Home News Currency Slump in West Africa Triggers Demand for Dollar Assets

Currency Slump in West Africa Triggers Demand for Dollar Assets

by Harry Choms
Currency Slump in West Africa

Mr Abiodun Adebimpe, Head of Custody Services for RMB West Africa, has attributed an increase in demand for Dollar assets in West Africa to a slump in the region’s currencies.

Most West African currencies, such as the Nigerian Naira (NGN) and the Ghanaian Cedis (GHC), have recently weakened significantly against the US dollar.

This has been attributed to the Russian-Ukraine war and the lingering effects of the COVID-19 pandemic, as the region is heavily reliant on imports.

Because most West African markets are import-dependent, there is a high demand for foreign exchange to pay import bills. However, due to declining external reserves, central banks are unable to meet these demands promptly and adequately, forcing businesses and investors to seek out dollar assets to mitigate the damage.

Furthermore, the majority of West African economies are commodity-driven, and any global economic development that affects the supply and/or demand for commodity imports and exports portends significant currency-weakening effects on the economies.

In an opinion piece, Mr Adebimpe noted that there is also a massive fiscal debt overhang in most West African markets, emphasising that one of the consequences is the need to borrow from bilateral and multilateral global lenders, who demand deliberate local currency weakening by local authorities by adjusting their official exchange rates accordingly to combat demand for foreign currencies.

According to him, weaker local currencies make converting to hard currencies more expensive and less appealing.

He stated that these factors have conspired to weaken West African currencies, and the outlook for the short to medium term remains negative.

He added that the loss of confidence in local currencies means they are no longer regarded as a stable store of value.

Mr Adebimpe stated that these issues had compelled businesses and investors to hedge and protect the value of their earnings and holdings in rapidly depreciating local currencies.

Investors’ preferred holdings, according to him, are dollar-denominated securities such as Eurobonds, dollar and other hard currency equities, debt instruments such as government and corporate bonds, and interest-bearing US treasury instruments. And the demand is expected to rise.

He did, however, reveal that most West African governments have begun to adjust their official exchange rates and, in some cases, borrow in US dollars to shore up their external reserves, though this may take some time.

However, he stated that there is a risk that the Naira will continue to depreciate in the coming months due to the significant difficulties in turning around an economy of its size through economic reforms, and that the expectation of lower crude oil and natural gas prices will likely continue to pressure the currency.

There is also the challenge of remittances flow to Nigeria: many companies are no longer supporting these transactions. Most importantly, tech investments which represented a significant increase in foreign direct investments (FDI), have all but reduced drastically.

As a result of turbulent economic conditions, businesses are increasingly turning to advisors with extensive global know-how for expert advice, he said.

related posts

Leave a Comment