Currency illiquidity and African Market

Currency illiquidity and African Market

African investment statistics are not showing the trends of dropping off, however, the currency illiquidity appeared to be a big obstacle for both the region’s treasurers and for investors at the same time. The total number of currencies that serve the region is 44 however, the majority of them are rarely traded on the global markets. As a result, we see that, although the region has a big potential to drive and promote the economic development of the entire continent, the currency illiquidity among other problems, such as reduced access to cross-border payments infrastructure is deterring intra-regional trade. There are several options suggested that will help to overcome this obstacle for future economic development.

The 2013 period was hard for the whole region as the commodity prices fell, especially the one of oil, which increased the vulnerability of the whole region towards economic shocks. The fact that the market was not diversified resulted in exports, being weighted towards raw materials. However, from 2019 we can see the positive tendency of economies of many countries to become more sophisticated, more specifically they started diversifying the industries such as manufacturing of secondary goods. For example, in 2018 a car company that was operating in the global market signed a contract with the government of Ghana and is expanding the market in Nigeria as well.

Foreign direct investments are increasing in the country but the Chinese role is not replaced yet, since it is the biggest contributor in many industries, having bilateral as well as multilateral relations with many countries. After China comes Japan, with the increased number of investments in especially infrastructure and the amount of Official Development Assistance is majorly growing and the role of Latin America is worth mentioning.

Demand exceeds supply

Currency illiquidity can still present a challenge and even raise the demand, but it needs to overcome the obstacles such as cross-border remittance capabilities. The foreign involvement in the regional economy makes the demand for the currency increase even more. However, the majority of those 44 currencies are not traded on the global market and the illiquidity of local tender is quite understandable.

After the global financial market was facing the post-financial crisis, it made the situation even worse. Many international banks have withdrawn their funds from the African markets that finally resulted in the lost investment opportunities. However, the fact that the economic development is not going as it should be, might be because of the human impact, not only because of the currency concerns. The inability to obtain local bidders for assistance delivery, when the need is immediate and severe, has dire repercussions within communities – money does not always reach its target in a timely manner and too much is lost due to conversion or distribution fees.

The currency policy is mainly governed by domestic politics and global market conditions. It is some kind of paradox that while the local currencies are in very bad conditions, the forex market is thriving in the African region. We see that the number of traders and Forex brokers in South Africa, Nigeria, or Kenya are increasing very rapidly since the financial environment, meaning regulations and demand on the market is quite beneficial for the companies.  However, in the attempt to manage the inflation rate and balance the social need on the market, countries across the region become more stressed by the currency volatility. To better visualize the currency volatility on the African market, the Zambian kwacha is depreciated by 42 % against the US dollar and has since rebounded, while the Angolan kwanza fell by more than 30 % and lead to the partial liberalization of the exchange rate regime since the beginning of 2018.

Trade deterrents

It is not a surprise that the currency illiquidity affected the foreign investments and it would have an impact on the proliferation of intra-African trade. This is considered to be one of the biggest factors that limit regional economic growth. According to the UN economic council, the lowest intra-regional trade proportion is the African region with a volume of 16% which is the lowest in the whole world. After the African countries decided to conduct the policy with a more diversified policy, this number is expected to grow.

The main reason for the low regional integration is the cost, even though there are cases of non-tariff barriers, the payment infrastructure is quite insufficient and it deters from accessing the liquidity to engage with other countries. Also, transactions are made at higher commissions that add to the additional costs.

The importance of Collaboration

There have been some suggestions from the West African Monetary Zone and the Eco that in order to solve this problem, it would be better to have a single African currency. However, some skeptics emphasize that the one currency to roll out in the 54 African countries, unilateral monetary policy would not manage to work properly, due to the fact that all the African countries have their own individual needs and demands.

Other collaborative ideas include the implementation of the Pan-African Payment system which will aim to reduce the cash dependency and transactions will be made easily, as it happens in the case of Transferwise, for example.

Also, there was the African Continental Free Trade Agreement signed by 44 African nations in 2018 which aims to reduce 90 % of the trade barriers between the countries. The exact expectations about this cooperation are still vague since it is difficult to make 44 countries agree on one policy, as they all have their individual needs and requirements, however, many financial experts believe that it will promote regional integration, but it will still need quite some time.