Impacts and responses

An Ethiopian manufacturing company faces challenges sourcing hard currency to buy imports. Around ten times a year it is forced to cease production. To navigate this, the company has increased the number of banks it works with from one to eight. But it’s not a simple solution. “Putting in the same invoice at two different banks is illegal in Ethiopia, so acceptance of my FX applications is all down to chance. It is like a game of Russian roulette that we play every day.”

Stories like these drive many people’s mindset towards investment in Africa. As explained by the late Hans Rosling in his book Factfulness, it is problems, or negative stories, that grab our attention, and shape overly downcast views of the world. It’s not that problems don’t exist, it’s that they are often not as widespread or insurmountable as we think, and we are slow to notice improvements.

At private equity conferences CDC attends, managing the FX issue is frequently on the agenda. The media, however, has spent relatively little energy going beyond headlines to examine how these challenges can be managed.

CDC commissioned new research from the EIU; Hard currency availability and debt sustainability in Ethiopia, Kenya, Nigeria, Tanzania and Zambia, to go this step further. Based on over 30 interviews, the EIU explores how businesses and investors have been affected and how they are finding solutions, in these five countries.

Each has a different relationship with hard currency. Where FX shortages are an issue, firms and investors are finding ways around the problem. Strategies such as developing export channels and investing in local production have helped manage the issue. Even in Nigeria, some firms have traded through shortages having built working capital buffers. However, in Kenya and Tanzania, FX availability has not been an issue.

The message is: forewarned is forearmed. Careful structuring and planning, combined with responsiveness and flexibility, is the key to successful investments. As one manager said: “We have had to respond to the market. We do not expect any of these markets to be straight lines and we always expect a few surprises.” The EIU will be hosting a webinar to present their findings in more detail and to provide a forum for discussing successful investment strategies in the face of FX shortages.

Read the report here

Register for the webinar here