Commodity and currency slump expose frailties of African economies
Slumping commodity prices have taken African currencies down with them, exposing the fundamental economic frailties of the world’s poorest continent by driving up inflation in countries that import most of their manufactured goods.
Regional economies are in no position to use their weakening currencies to their trade advantage because they have few exports beyond their natural resources.
The hardship for households has been compounded by rising prices for food – one commodity that has defied the price fall due to drought in southern Africa
The economic problems are growing in countries from South Africa, a major producer of minerals and precious metals, to nascent natural gas producer Mozambique and Nigeria, the continent’s top exporter of crude oil.
They highlight the need for African economies to diversify and adopt strategies for industrialisation to reduce their reliance on imports, say economists. But they acknowledge this will be difficult in the current environment as investment is hindered by rising inflation and interest rates, as well as the power shortages that plague many areas.
“For commodities producers the situation is very clear and very negative,” said Francois Conradie, head of research at NKC African Economics.
Inflation, which many African economies had contained in recent years, is picking up pace as currencies crumble, driving up the prices of the goods they don’t produce and so need to import – the vast majority of manufactured products.
Even where central banks have introduced additional measures in an attempt to maintain stability, such as in Africa’s biggest economy Nigeria, which has introduced capital controls, inflation is picking up.
“In Nigeria’s case, a lot of importers cannot get dollars from official channels, so they get their dollars at the black-market rate which can be almost double the official rate. Their sales price reflects that,” said Conradie.
Inflation in Nigeria, which fell from close to 14 percent in 2010 to below 8 percent in 2014, has been gathering pace and hit 9.6 percent in January.
Even South Africa, the continent’s most industrialised economy which saw its rand currency lose over 30 percent in 2015, has failed to translate currency weakness into an export boon.
A fall in the value of its exports pushed its current account deficit to 5.1 percent of gross domestic product in the fourth quarter of 2015, from 4.3 percent in the third.
In Mozambique – which has vast natural gas deposits – inflation was 12.18 percent in January, the third straight month of double-digit price increases, fuelled by a 30 percent depreciation in its metical currency the past 12 months.
Angola, Africa’s third-largest economy and second-biggest crude producer, is almost completely dependent on oil, which accounts for over 90 percent of foreign exchange revenues.
It saw inflation rise to 17.34 percent in January from 14.27 percent in December. Its kwanza currency fell more than 30 percent last year.
President Jose Eduardo dos Santos last week urged “entrepreneurs” to lift domestic production of goods and food.
But it may be a case of too little, too late in a country where analysts say there has been no serious attempt at industrialisation, with billions of dollars squandered on “industrial parks” where almost nothing is produced.
FOOD PRICES RISE
During the commodities boom – fuelled by top consumer China’s rapid growth and industrialisation – the value of Africa’s exports soared to $420 billion from $100 billion between 2000 and 2011, according to World Bank data.
Virtually all of those exports were commodities; the value of Africa’s manufactured goods in that period rose only to $33 billion from $13 billion.
The commodities boom financed an African consumption binge on imported goods – domestic demand accounted for two-thirds of African growth in that period – that the continent can now ill afford as commodity revenues and currencies sink.
One telling exception to the current trend is Kenya, which has big tourism, flowers and tea industries so is not as reliant on commodities. Its currency has appreciated 0.6 percent since the start of 2016.
Drought in southern parts of the continent since last year has, meanwhile, further squeezed household budgets. Prices for the staple maize crop in South Africa and Malawi have doubled over the past year and food prices have also risen elsewhere in Africa, albeit at a slower rate.
“While low commodities prices have hammered single-commodity dependent economies across the last 18 months, the El Nino-led drought across southern Africa has exacerbated this by reducing agricultural output,” said Augustine Booth-Clibborn, a research analyst at Africa Risk Consulting.
Until there is a significant recovery in commodity prices – which looks doubtful in the short term after a slew of weak Chinese data and signs that oil demand will remain far from robust – African governments have limited policy options.
Several countries, including South Africa, Malawi and Angola, have raised interest rates in the past six months in an attempt to constrain inflation and support their currencies, with limited effect.
“Another important factor are power shortages, exacerbated by low water levels, which have slowed growth and added to inflationary pressure as tariffs rise, ” said Booth-Clibborn.
“The combined result holds back the service-based and manufacturing businesses that could drive non-commodity exports and economic growth.”
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