As a frontier market, the countries of Africa represent 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 developing, emergent continental markets 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 the FOREX Africa report: news you need to slim down your currency risk. Let’s see what’s happening out there.
Rwanda is one of the best places in Africa to do business, from a regulatory and government-burden standpoint.
Paul Kagame, the Tutsi general who put an end to the Hutu-led 1994 Rwandan genocide, has ruled the country ever since. His government has instituted a number of reforms that has made the government burden in Rwanda one of the lowest in Africa.
What’s more, compared to many African countries Rwanda is a relatively clean place in terms of bribery and corruption. The World Bank has given the country an overall score of 58 out of 183 on its Ease of Doing Business rankings while Transparency International, the anti-corruption non-government orgnization, pegs Rwanda as the fourth-least corrupt country on the continent and the 49th-least corrupt country in the world. Conditions would seem ripe, then, for growth to occur.
Luckily, this seems to be happening, and despite the country’s conflict-ridden past and landlocked location, growth has picked up over the last decade. In 2013, the economy grew an estimated 7 percent following years of relatively stable, steady growth. Unfortunately, external factors may now be aligning to put the squeeze on one of Central Africa’s freest, most open economies.
That’s because worries over a slowdown in China, the end of easy-money policy in Europe and the U.S., and fear over the health of U.S. corporate profits have dampened appetite for risk and, with it, exposure to developing markets such as those found in Africa. While Rwanda does not have nearly the exposure to global markets as, say, South Africa or Kenya, the country’s small size and relative openness to market forces mean such problems can make themselves felt quickly even in Kigali.
Indeed, as a consequence of these changed conditions a premium has been put on security – meaning that investors are fleeing to the perceived safety of the U.S. dollar. This increases the value of the dollar vis-à-vis other currencies and as a result puts downward pressure on them. This has been felt all across Africa, especially in South Africa where the widely traded rand has been hit particularly hard. South Africa, however, is relatively strong and has a diverse enough export base that, barring political problems and labor strife, should allow it to weather a drop in demand for the rand.
Rwanda, however, is different. It has no manufacturing sector to fall back upon when its currency depreciates and it has no significant mineral or energy resources, which are priced in dollars, that it can export. Thus, Rwanda is a one-sector economy – agriculture – and can do little to buffer itself against the ups and downs of the foreign-exchange market.
Since the end of 2008, the relatively stable Rwandan franc has collapsed, losing 18.5-percent of its value vis-à-vis the greenback and hitting a record low of over 680 RWF to the dollar this past week. Prior to the global economic crisis, it traded in a range of 530 RWF to 575 RWF to the dollar. While depreciation of the currency is sometime a boon for exports, such a sustained downturn in the value of the Rwandan franc could turn out to be very costly.
First, given that Rwanda exports mainly agricultural products, its terms of trade with the outside world is so low that a sizable and sustained downturn in the franc could make the financing of imports very difficult. This would not only spark off consumer inflation, but could make investments in Rwandan manufacturing and infrastructure much too expensive to contemplate.
Second, even though Rwanda had the majority of its national debt forgiven by its external creditors, significant debt remains. Rwanda’s depressed currency means debt repayment becomes much more difficult. Luckily, the debt load remains manageable, but this, as the African Development Bank points out, is dependent upon continued investments being made to improve economic productivity. Enhanced productivity, goes the argument, will make the debt easier to pay off.
But a collapsed currency means financing those investments is becoming more difficult. Without investment, productivity doesn’t grow, and without growth there is no additional revenue that can be tapped to pay off an increased debt. The potential tragedy here is that a government that has done all the right things to make Rwanda a good place to invest and do business could see its economy heavily damaged due to external factors over which it has no control.
Luckily, Rwanda is still a darling of foreign donors and the country still receives significant assistance from Western governments and NGOs. Aid, however, is no substitute for self-sustaining economic growth. Aid is fickle, comes with strings attached, and does little to build an economy. Indeed, development assistance of this type mostly functions as first aid – it keeps a sucking chest wound from getting worse but does little to improve the situation for the better, and can even foster dependency in the long run.
What Rwanda needs is a stronger currency that will allow it to finance its own development on its own terms. Barring a miracle, however, this does not seem possible in the near term. Rwanda’s currency downturn looks to continue indefinitely and so will likely serve as an anchor on growth, and all that entails, for the foreseeable future.
This is unfortunate for two reasons. First, it could undermine the argument for Western-backed good-governance reforms of the type instituted in Rwanda by the Kagame government. If reform cannot save Rwanda, goes the argument, then why bow and scrape to Western donors when others – such as the Chinese – are willing to invest and provide aid with no political strings attached? Quite simply, without an example of what good government and a low regulatory burden can do for a country, others on the continent might be understandably reticent to try it.
Second, and more ominously, a stagnant Rwanda might once again see the return of ethnic conflict and political instability. True, Paul Kagame and his ruling party have gone to great lengths to douse the hatred that led to neighbor killing neighbor during the 1994 genocide, but only a peace cemented in place by shared prosperity can guarantee that those flames are permanently extinguished. Barring that, it is quite conceivable that Rwandans tired of the economic status quo could once again turn to extreme ideologies – and measures – to rectify their situation.
As with Rwanda, so with many other countries in Africa – even the relatively well-off or well-positioned ones like South Africa, Kenya, and Nigeria. Each of these “big three” countries could see political unrest worsen if their economies do not continue to churn out enough jobs and wealth creation to satiate their populations’ rising demands. The situation is worse, though, for all the many other countries with economies that look much more like Rwanda than Africa’s big three.
For countries that, like Rwanda lack economic shock absorbers when times get rough, good government can only do so much. At best it can provide a fertile field ready for growth, but only so long as good weather or strong levies keep devastating floods away.
Reform, no matter how well intentioned or competently carried out, can’t do it alone.
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.
