As frontier markets, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.
Luckily, the ups and downs of the African currency markets aren’t one of them if you know where to look. To help with that, AFKInsider has compiled all the news you need to know now in order to slim down your currency risk in the week ahead. Let’s see what’s happening out there.
This week we will stray a bit from covering Africa’s larger economies in order to examine some of the action surrounding one of Africa’s smallest, least well-known currencies – the Gambian dalasi.
Gambia itself counts as the continent’s smallest country – clocking in at a little more than 4,000 square miles extending on either side of the Gambia River. Except for its 50-mile Atlantic coastline, the country and its nearly 1.8 million people are almost entirely surrounded by Senegal, a much larger West African neighbor.
An economic powerhouse Gambia is not, but to savvy traders, the benefits of a small country with a relatively open economy like Gambia’s are that often-overlooked places featuring relatively thin markets can make for some interesting action. Being so open and so tiny, a currency like the dalasi can serve as a barometer of sorts for wider feelings on Africa as a whole. If, that is, one can stand the volatility that is so often found in these smaller markets.
Consider, for instance, the dalasi’s performance over the last 10 years. As the chart below shows, the dalasi has swung widely in valuation in the last decade, reaching a high point of 18.5 dalasis to the dollar in October of 2007 before tumbling to a low of 36.5 to the dollar in August, after which the government took emergency steps to stop the currency’s continued decline by imposing foreign-exchange restrictions and officially fixing the value of the dalasi at the rate of 35 to the dollar.
Gambian Dalasi to US Dollar, 2003 – 2013
Since then, while the market has tried to push the Gambian currency lower, each subsequent push has been weaker – perhaps suggesting that the dalasi’s non-stop depreciation since October of 2007 may be coming to an end. Indeed, once the currency peg was repealed on Oct. 9 the dalasi has since stabilized at around 32.55 to the dollar.
Gambian Dalasi to US Dollar, Year-to-Date
So, what does this mean going forward? As a small, agricultural economy that also has significant tourism, Gambia is extremely vulnerable to both external shocks, the natural variability of weather, and the perception of outsiders. As one can see from the last several years of economic growth, the country’s performance has varied widely with weather being a major factor. The steep contraction in the country’s economy in 2011 was due to a drought that significantly impacted the country’s agricultural output.
Gambian Economic Growth,
Percent Increase: 2003 – 2012
That being said, the country’s leadership has done a fair job of keeping the country on a relatively steady course. Small-scale manufacturing associated with the country’s agricultural sector, for instance, is a growing component of Gambia’s economy while a stable political environment has made Gambia a relatively safe place for European tourists. Indeed, steady leadership by the country’s current president, Yahya Jammeh – who took power in a coup in 1994 but has since been returned to office in quasi-free elections since 1996 – has seen the country make some progress on several development goals.
Still, the less than free-and-fair political process in Gambia has made government less accountable than it could be and has made sound economic management a somewhat haphazard affair highly dependent on direction from the top.
The International Monetary Fund, for instance, described Jammeh’s policymaking on economic matters “inconsistent,” highlighting the significant political risk that exists in Gambia. This, too, is reflected in the government’s significant debt load, which in 2012 stood at more than 20 percent of government revenues – an important factor that has certainly been a weight on the dalasi’s value.
Add it all up and you have a lot of near-to-medium term headwinds working against Gambia and its currency, but which nonetheless are set against the larger background of Africa’s continued economic maturation and the slow return of steady, sustainable economic growth in the rest of the world. Much like with the rest of Africa, then, whether one takes a gamble on Gambia is largely determined by how optimistic one is about the continued performance of emerging Africa and growth outlooks in Europe, the U.S. and Asia.
If you’re an optimist – or looking for a canary in the coal mine – then keeping an eye on Gambia might be advisable.
Jeffrey Cavanaugh holds a Ph.D in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South.
