By dr. Ryan Lombard
Imagine the following to yourself: In a matter of 30 days, the rand tumbles from R18.70 to R26.18 for an American dollar, that is to say by 40%. To date, the biggest tumble in the rand’s history. This surpasses the drop in the rand’s exchange value against the dollar when Jacob Zuma fired Nhlanhla Nene as finance minister in December 2015, or the fall of August 1985 with PW Botha’s Rubicon speech.
From time to time such sharp declines happen in Africa.
42%. That’s how much the Angolan kwanza decreased against the dollar in June 2023. The fall of the Nigerian naira (63%) was even greater. In Zimbabwe, the price of a US dollar in the primary currency markets has more than doubled.
Over the years, the authorities in Angola, Nigeria and Zimbabwe have, at times, tried to keep the foreign values of their currencies stable by pegging the dollar exchange rate.
Stable exchange rates are supposed to promote trade and encourage foreign investment. It also anchors inflation expectations.
However, the pressure on such a fixed exchange rate soon becomes unbearable if the central bank begins to finance the government’s budget deficits with the help of the printing press. People are losing their confidence in the country’s currency. They then try to exchange it as quickly as possible for goods or for stronger foreign currencies.
This behavior results in the central bank’s foreign exchange reserves falling sharply. Dollar shortages arise and currency controls are usually tightened. Foreign currency transactions are also increasingly taking place in the informal market (the black market), where the dollar and other strong currencies trade at significant premiums. When the authorities finally succumb to the pressure, the devaluation of the currency is usually sudden and often sharper than economists had predicted.
In Angola, the kwanza’s latest fall is largely the result of the market forces of supply and demand. A dollar shortage weakened the exchange value of the kwanza vis-à-vis the dollar. The Angolan authorities are apparently stingy with their dollar sales. The exchange value of the kwanza is therefore no longer the target of the country’s monetary policy and the government is in favor of more flexible exchange rates. The international price of oil has fallen sharply in the last few months and an advantage of a weaker kwanza is that it dampens this shock and promotes diversification.
Nigeria is of course also an important oil producer in Africa. In June 2023, the new government dismissed the head of the central bank, Godwin Emefiele, and scrapped the country’s long-standing complicated system of certain exchange rates for certain currency transactions, and different exchange rates for other currency transactions. The naira was overvalued before this decision. Strict exchange controls and import restrictions were used to ration foreign exchange. After the dismissal of Emefiele, the government’s interference in the currency market was relaxed. The naira consequently depreciated sharply to the levels in the informal market.
Just as in the case of dollar shortages, sudden sharp drops in currency values are bad news for South African companies with subsidiaries in the countries concerned. Proof of this is the currency losses that listed South African companies with subsidiaries in Nigeria and Angola have already disclosed in their financial statements in the past. Especially firms with large foreign dollar debts, or which due to exchange controls and dollar shortages could not exchange their kwanzas, nairas or Zimbabwean dollars for US dollars or other strong currencies in time, are badly affected.
As a result of the drastic weakening of the currencies, the import prices in Angola, Nigeria and Zimbabwe will rise sharply and the inflation rates in the countries will probably accelerate.
In Africa there are many challenges. In many countries the currency markets are weak and hedging difficult. One of the major risks for investors or businesses is sporadic dollar shortages, or tumbling currencies such as Angola, Nigeria and Zimbabwe have now proven anew.
- Dr. Riaan Lombard is an independent economist.