A growing economic challenge is sweeping across the African continent, threatening the stability of numerous nations and impacting their ability to attract investments. The scarcity of US dollars has become a critical issue, and its consequences are becoming increasingly evident in African economies. This scarcity has led to a new dividing line for investors, differentiating between nations that have successfully addressed the issue of dollar liquidity and those that struggle to guarantee access to the currency needed for investment and returns. It’s important to explore the causes, effects, and potential solutions to the dollar scarcity crisis in African countries.

African governments are grappling with a deepening shortage of hard currency, which has forced them to explore various measures to address the issue.

As Bloomberg reporters Colleen Goko and Karl Lester M. Yap highlight, these measures include bartering, currency devaluations, central bank exchange controls, and seeking assistance from international organizations like the International Monetary Fund (IMF) and Middle Eastern countries.

Investors are closely monitoring the situation and rewarding countries that have managed to boost their dollar liquidity. On the contrary, nations struggling to guarantee access to the US dollar are being punished by investors. This has led to a clear divide between countries with adequate reserves to cover import costs and debt repayments and those without, further exacerbating the crisis.

African currencies have borne the brunt of this crisis, with over a dozens of them losing at least 15% of their value against the US dollar this year. The devaluation of local currencies has affected various aspects of these economies, including Eurobond issues such as Egypt, Nigeria, and Angola, which were compelled to devalue their currencies. Capital inflows have dwindled, causing currencies like Kenya’s shilling and Zambia’s kwacha to weaken considerably against the dollar. Kenya is facing sizable dollar-debt repayments in the coming year, while Zambia is grappling with defaulting on its Eurobonds.

The consequences of the dollar scarcity crisis are evident in investment losses and market turbulence.

Kenya’s dollar bonds have suffered losses of 2.1% since July, while Nairobi’s benchmark stock index has plunged 32% in 2023, making it the worst-performing market among the 92 global markets tracked by Bloomberg.

Zambia, Mozambique, and Nigeria have been forced to rely on domestic issuance in shallow markets to meet their financing needs, leading to higher borrowing costs. African sovereigns have been largely excluded from international debt capital markets since April 2022.

Foreign investors are wary of investing in countries facing severe currency depreciation and difficulties in repatriating returns. For example, in Zambia, foreign holdings of domestic debt have declined, in part due to the restructuring process and liquidity issues. This lack of foreign investment exacerbates the crisis, making these nations highly dependent on concessional funding, such as IMF loans.

The IMF has stepped in to provide assistance in some cases, acknowledging the severity of the situation. Few weeks before, the IMF announced an expansion of financing to Kenya by $938 million to bolster its reserves ahead of a $2 billion Eurobond maturity. While this intervention has provided some relief, it has not fully resolved the crisis, as yields on Kenyan bonds remain high.

Investors are increasingly favoring countries that face fewer pressing foreign-exchange needs. Nations with manageable dollar-denominated loan amounts, bond repayments, and substantial foreign reserves are more appealing. This trend has made countries like Egypt an attractive investment destination. Citigroup Inc. strategists have turned bullish on Egypt’s dollar debt due to increased sales of state assets and the government’s commitment to meeting IMF targets. Egypt’s central bank is also securing significant deposits from Saudi Arabia and the United Arab Emirates.

Egypt has emerged as a surprising success story amidst the dollar scarcity crisis, with its Eurobonds delivering impressive returns of 8.7% in dollar terms during the second half of this year.

This stands in stark contrast to the average losses experienced by developing nations in a Bloomberg sovereign credit index over the same period.

Investors, faced with uncertainty in the African sovereign bond market, are increasingly favoring nations that have diversified their sources of financing. Countries like Ivory Coast and Senegal have attracted investor attention due to their ability to secure blended finance deals at reasonable costs. Ivory Coast, in particular, has also obtained financial support from the International Monetary Fund (IMF), strengthening its position in the eyes of investors.

Ivory Coast’s CFA franc, which is pegged to the euro, provides an additional layer of stability by shielding it from currency fluctuations. Senegal, on the other hand, is actively promoting public-private partnerships in climate finance, drawing investments and bolstering its financial resilience.

When examining the performance of African Eurobonds, it becomes evident that Ivory Coast and Senegal have experienced less severe losses than countries like Kenya and have outperformed the average since July. Their bonds have shown stronger performance compared to their peers in the region, attracting investor interest and trust.

While investors gauge the performance of sovereign bonds, the dollar scarcity crisis has had a significant impact on local consumers and businesses. Import costs have surged, fueling inflation and causing hardships for people across the continent.

In Nigeria, essential prescription drug prices, including those for hypertension and diabetes, have tripled in the past year. Zimbabwe’s largest retailer has reported that its sales volumes have dropped below the break-even point due to rising costs and unfavorable exchange rates, which have prompted consumers to turn to the informal sector. Malawi has witnessed a drastic increase in the price of corn, a staple food, which has more than doubled over the past year, affecting the affordability of this crucial commodity for its citizens. Despite some nations’ ability to navigate the dollar scarcity crisis more effectively than others, the risk of countries remaining on the verge of economic crisis remains a concern for investors. The limited availability of substantial dollar reserves continues to pose challenges for African economies.

The dollar scarcity crisis in African countries continues to be a complex and multifaceted issue, impacting investors, consumers, and businesses alike.

While some nations have found ways to mitigate the crisis and attract investment, others are still grappling with significant challenges. The ability to secure alternative sources of financing, stabilize currencies, and manage import costs will remain crucial for African nations seeking to overcome the dollar scarcity crisis and ensure economic stability and growth. The path forward for these countries will require a combination of sound economic policies, international support, and resilience in the face of ongoing uncertainties.

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