African central banks, which have less than a tenth of the emerging-market foreign exchange reserves, are burning through their stockpiles faster than any regions in the world in a bid to stop local currencies from falling further against a globally stronger US dollar.
Falling commodities prices coupled by interest rate hikes in the US have pushed many African currencies down against the dollar since the last quarter of 2014, with seven out of the 20 worst-performing currencies coming from the region.
For many central bank governors a move to tightening liquidity on the money markets by raising interest rates and using other monetary tools at their disposal has not yielded much, forcing them to intervene in the market by selling dollars directly to commercial banks.
“African central banks are being pushed to the brink,” Nema Ramkhelawan-Bhana, an economist at Rand Merchant Bank in Johannesburg, told Bloomberg. “They’re going to have to accept more weakness.”
Ghana’s sale of dollars in the interbank market since July 1 has helped the cedi recover all of its losses this year.
The sale helped clear a 26 percent depreciation on the cedi against the dollar in the first half of the year, but the local currency started sliding again immediately the Bank of Ghana stopped pushing greenbacks, as demand for greenbacks by companies paying foreign suppliers increased in recent weeks.
“We are likely to see this panic-buying continue unless the central bank resumes the vigorous support it provided in the previous weeks,” Biggles Amponsah, an anatalyst Accra-based Dortis Research, told Reuters.
Nigeria, Africa’s largest economy and top oil producer, burned through 27 percent of its reserves as the Central Bank of Nigeria tried fruitlessly to stem a 22 percent plunge in the Naira since September 2014. The bank has now resorted to stiff trading restrictions that have made it difficult for local companies to pay their overseas suppliers.
Angola, another large oil producer, has shed 10 percent of its forex reserves this year, while Kenya, a non-oil producer, has sold 13.5 percent of its meager hard currency stockpile so far this year.
“Other economies in the region don’t have the reserves firepower even to attempt that. I’m very bearish,” Gareth Brickman, an analyst at Johannesburg-based advisory ETM Analytics, told Bloomberg.