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Lagos - Currency devaluations from Kazakhstan to China are heaping pressure on African central banks to relinquish control of their exchange rates as they run down reserves faster than any other region.
From Nigeria to Uganda, African policy makers are burning through their foreign reserves and tightening monetary policy to prop up their currencies. Thursday’s move by Kazakhstan, central Asia’s largest crude exporter, to abandon its currency peg has intensified speculation that authorities in Africa will devalue or halt intervening in their foreign-exchange markets.
“I’m sure African central banks are watching avidly what’s happened in Kazakhstan,” Yvonne Mhango, an economist at Renaissance Capital in Johannesburg, said by phone on Thursday.
“It puts increasing pressure on them, especially Angola and Nigeria. Investors are already expecting devaluations in Nigeria and Angola. This just heightens those expectations.”
African central banks from South Africa to Ghana have been taking aggressive action this year to bolster their currencies, concerned by inflation pressure emanating from rising import costs. Commodity-dependent nations such as Zambia and Ghana are struggling to cope with currency declines of more than 20% against the dollar since January.
Half of the 20 countries that have lost the most reserves as a proportion of the total in the past year are from Africa, according to data compiled by Bloomberg. Nigeria’s reserves have dropped 20% to $31.6bn in the past year, Angola’s are down 16%, while Kenya’s slumped 14% since January.
‘Costly exercise’
“Some countries just don’t have the level of reserves to use that frequently and it’s a very costly exercise,” Nema Ramkhelawan-Bhana, an economist at Rand Merchant Bank, a unit of Africa’s biggest lender, FirstRand, said by phone from Johannesburg. “We are going to see a lot of tightening of monetary and financial conditions across these African countries.”
The move by Kazakhstan, which caused the tenge to plunge as much as 24% against the dollar, followed China’s depreciation of the yuan last week and Vietnam’s third devaluation this year of the dong on Wednesday, while Russia stopped managing the ruble in November.
Nigeria and Angola, Africa’s biggest oil producers, have held off on weakening their currencies in recent months despite Brent crude prices falling almost a fifth this year to below $50 a barrel.
Naira risk
Nigeria’s naira may be lowered by 15% to 20% against the dollar following the action by Kazakhstan, according to Mhango. The currencies of the two nations have tracked each other closely since both were devalued within 10 weeks of each other in 2008-09, she said.
The Central Bank of Nigeria said it has no plans to ease its rules or devalue.
“We haven’t seen any reason so far to institute a change in the foreign-exchange policies,” Ugochukwu Okoroafor, a spokesperson for the bank, said by phone from Abuja, the capital. Genuine demand for foreign exchange will be met by the central bank, “but once it comes as a result of speculation, we’ll fight back,” he said.
The naira fell 0.5% to 199.25 per dollar on the interbank market at 10:50 on Friday in Lagos. It has been mostly flat since the start of March after the central bank stopped banks from trading the currency without matching orders from customers. Forward prices indicate it will fall to 236.7 in six months and 260 in a year.
While Angola’s central bank devalued the kwanza about 6% on June 5, it has mostly maintained the currency since then at about 126 to the dollar. Central bank Governor Jose Pedro de Morais Jr on August 17 asked Angolans to cut their use of foreign-exchange by half, according to local television reports.
