BOHANI HLUNGWANE: Hard for Africa to grow if it does not control currencies

The 15th Brics summit held in SA recently decided to expand the bloc to include more countries and debated the relationship with the US and the longer-term implications for the dollar.

While it is clear that the dollar remains the de facto currency of global trade, the foreign currency liquidity shortage in some African countries is a key trade issue that needs to be tackled and overcome for prosperous trade across the continent to continue. 

Kenya, Ghana, Tanzania, Nigeria and Angola have all recently struggled with dollar shortages and liquidity problems, creating a challenging operating environment in which to attract foreign direct investment (FDI). Considering the resource-rich nature of the continent we should be doing everything in our power to create an environment that is conducive to trade and investment.  

Angola is an interesting case. As an exporter of crude oil, which is traded internationally largely in dollars, it should be a dollar-rich operating environment. Unfortunately, it is having to use a large portion of its dollar income to settle dollar-denominated debt and high-volume imports into the country, which in turn is devaluing the kwanza.

Angolan policymakers have responded to this shortage in a couple of ways, including by building smaller refinery capacity, diversifying away from reliance on oil, looking to boost agriculture, and regulations that specifically encourage investment in agriculture. All of this is to build up local capacity and the supply of dollars.  

The Angolan example highlights the challenge: it is exceedingly difficult for Africa to grow if it does not control the currency or currencies in which it trades. 

In Kenya, currency swaps have become a popular tool to help deal with foreign currency shortages, but they are not a long-term solution. In short, a currency swap is an agreement in which two parties exchange the value of a loan in one currency and settle in another.

Consequences

While these have gained popularity in places such as Kenya and Tanzania as a solution to foreign exchange shortages, there is a sense of kicking the can down the road and many people are asking whether the market will have matured enough six or 12 months down the line to face the consequences of raising interest rates or currencies that fluctuate in the wrong direction.

At a sovereign level, Kenya has driven a government-to-government trading market for trading oil in the hope of enhanced liquidity in terms of dollars down the line.  

On the ground there is a lot of focus on digitisation and how we can bring together fintech companies, development finance institutions and other parts of the ecosystem to tackle this issue. Recently HSBC made a $35m investment in TradeShift, a platform for building business-to-business payments and supply chain procurement. Absa has invested in agritech start-up Khula!, a platform that connects farmers, buyers and funders across the agriculture value chain on the continent.  

Innovative digital marketplaces like these will be key to driving trade on the continent, particularly as the African Continental Free Trade Area (AfCFTA) becomes more active.  

There is no question that the dollar will remain the primary currency of settlement for the immediate future, but the recent Brics summit highlighted the interest in Africa as a continent. China and India are making significant investments in trade partnerships and clearing in currencies such as the Indian rupee and the Chinese yuan. 

While 95% of our clearing goes through “Western” institutions in the US and Europe, we cannot ignore the fact that the four largest banks in the world are now Chinese. There is a shift happening in global financial markets and we need to ensure that we develop financial solutions that are able to accommodate these changes.  

• Hlungwane is managing principal & head of trade & working capital (pan Africa) at Absa Corporate and Investment Banking.