Several African currencies are set to remain under pressure this week amid rising business demand for dollars and growing oil prices globally. African currencies under pressure, Nigerian naira, Ghanaian cedi and Ugandan shilling are among the most vulnerable currencies, whereas other currencies like Kenyan shilling and Zambian kwacha managed to show some resistance to volatility.
According to economists, several factors – including rising cost of imports, increased energy prices and robust demand for foreign currency by companies – are putting currency markets under new pressure.
Fresh Pressure on Nigerian Naira
The Nigerian naira is likely to come under continued pressure since fuel importers will be increasing their dollar purchases to rebuild their inventory levels.
Despite the improvement in local refining capacity in recent months, the demand for imported petroleum products and industrial inputs will be creating a demand for foreign exchange. Such a trend is likely to exert further pressure on the naira, especially at a time when businesses are buying dollars as they anticipate further changes in the exchange rate.
It should be noted that the rising cost of foreign crude oil associated with geopolitical factors has been a burden to businesses that value foreign currencies.
Pressure on Ghana’s Cedi
The cedi in Ghana is also likely to come under renewed pressure since there has been high demand for foreign currencies by importers and multinational companies.
There will be continued demand for dollars from businesses for payment of foreign suppliers and also foreign investors for dividend distribution. With continued higher demand than supply of dollars, there has been some depreciation of the cedi despite efforts to stabilize the foreign exchange market.
Ugandan Shilling Suffers Due to Increased Energy Prices
The Ugandan shilling is also facing weakening due to the rise in energy prices and growing import expenses.
As Uganda is dependent on imported oil products to meet its domestic demand, the increasing prices of oil in the international market mean more demand for foreign currency. This causes more stress on the local currency and operational costs for those businesses that depend on imports.
Not All African Currencies Feel the Same Pressure
Not all African currencies are facing the same kind of stress.
For example, Zambia’s kwacha has been holding its position due to good copper prices in the international market and growing foreign currency inflow from exports.
Similarly, the Kenyan shilling has continued its stable performance due to consistent foreign currency inflow through remittances and wise monetary policies at the central bank level.
These have helped these two countries keep away from the pressure that the other African currencies have been facing.
Expectations for Businesses & Importers
If the local currencies continue to weaken, businesses dependent on imported products will incur more operational costs.
Some businesses might also face difficulties when trying to buy dollars due to heightened demand from corporations, especially during periods when demand is high.
Firms with low margins are more likely to increase prices, which would lead to the rise of inflation in various industries.
Central Banks to Stick to Tight Measures – African currencies under pressure
As part of measures aimed at controlling inflation and protecting the value of their currencies, many African central banks are likely to maintain high interest rates.
By keeping interest rates high, many African central banks would limit the excessive use of foreign currency, which leads to inflation, but at the same time, this measure will also affect business investments and growth.
The market players will watch future inflation data, central bank communications, and changes in the prices of oil for additional signals about the performance of African currencies in the coming weeks.
Even though some level of volatility is likely to continue in the short run, nations with healthy exports, good foreign currency reserves and sound monetary policy are likely to be well-placed in terms of stability.
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