By John Ikani
Small and big businesses in Africa are constantly taking a hit from the drastic shortage of dollars, a development that leaves them scrambling to access the hard currency used for facilitating cross-border transactions like the importation of raw materials and IT services.
Households are also not spared of challenges wrought by the greenback scarcity as parents contend with the hard task of sourcing dollars to pay the tuition fees of their wards schooling abroad.
A recent testament to the worsening dollar scarcity plaguing Africa was the directive issued by the Central Bank of Kenya last month mandating commercial banks to ration sales of the greenback to importers, manufacturers and any other entity in need of the hard currency. Compliance with the directive was swift and left most businesses in Kenya with no choice but to accept the new norm of a daily dollar transaction cap of $50,000!
Lamentations of the havoc wreaked by dollar shortage in Africa will be less comprehensive without the mention of Nigeria where many commercial banks reduced the foreign transactions their customers can facilitate with Naira cards. The measure embarked upon early this year in Africa’s biggest economy saw the likes of Zenith Bank, First Bank and GTBank steeply reduce their customers’ foreign currency spending cap from the highs of $100 to $20 and $50 respectively.
Did you know that the Naira recorded one of its biggest falls on May 16 when it exchanged for N421.5/$1 at the official Investors and Exporters (I&E) window? Owing to difficulties in obtaining dollars at the official rate many in need of the greenback often fall back on the black market rate which has highs of N610/$1.
Another challenge that is indicative of the worsening dollar crisis in Africa is the difficulty businessmen face in repatriating revenue/profits between countries. Last week, Kenya Airways announced its suspension of air ticketing activities in Malawi for reasons not unconnected to the worsening forex crisis in the Southern African nation. A statement issued by the airline to announce the suspension partly read:
“Following increasing foreign currency repatriation difficulties experienced in Malawi in the recent past, Kenya Airways regrets to inform our Trade Partners that Kenya Airways has suspended ticket issuance authority in the Malawi market. Subsequently, with immediate effect, the ticketing authority for all agents (including KQ CTOs and ATOs) in Malawi shall be withdrawn until further notice.”
Why the scramble, What’s responsible?
A recent report released by the International Monetary Fund (IMF) offered an explanation. The IMF in the report titled How Africa can Navigate Growing Monetary Policy Challenges attributed the dollar scarcity Plaguing Africa to wide spreads between bid and ask prices.
“Shallow markets (i.e., markets with limited liquidity) can amplify exchange rate movements and yield excessive volatility. Foreign exchange markets tend to be shallow in many countries in the region, as evidenced by wide spreads between bid and ask prices,” said Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department, Tobias Adrian.
What do bid and ask prices mean in the foreign exchange market?
According to AXIORY, A bid is essentially the maximum price that the buyer is willing to pay for the asset; Ask is the minimum price at which the seller is willing to sell the asset that they own.
The process of exchanging bid and ask prices on certain assets finally concludes in a price that is acceptable for buyers, as well as sellers. Usually, buyers want as low price on the asset as possible, while sellers want to get the highest price.
The bid and ask prices are usually different from one another – bid price being low and ask price being high. The difference in the bid and ask price foreign exchange market is called a spread.
Asides citing wide spreads, the IMF noted that another factor responsible for African nations’ vulnerability to dollar illiquidity/scarcity is the presence of many foreign-currency-denominated liabilities.
Solutions the Washington-based international financial institution proffered to reduce vulnerabilities over time include reducing balance sheet mismatches. Others are developing money and foreign currency markets and reducing exchange rate passthrough by building monetary policy credibility.
