Higher prices and budget constraints to hit Africa from war in Ukraine
Russia’s invasion of Ukraine is likely to hurt Africa’s fragile, coronavirus-ravaged economies due to budget constraints, weaker investment flows and higher commodity costs.
The most pronounced challenge will be soaring prices, particularly of oil and wheat, as these will have implications for inflation, the current account and fiscal balances, said Yvonne MhangoRenaissance Capital’s head of research for the continent.
Crude has jumped more than a fifth since the start of the war to hit a high of nearly $120 in 2008. Wheat prices extended their meteoric rally, surging 50% last month to hit their all time high level in 14 years, when shipments from one of the largest producing regions in the world have practically stopped.
The war and sweeping sanctions imposed on Russia have disrupted supplies from the Black Sea at a time when global stocks are already tight. Ukraine and Russia ship more than a quarter of the world’s wheat exports, and the fighting has closed ports and halted transportation.
African countries such as Nigeria, Ghana, Egypt and Kenya, where transport and food account for a large share of consumer price indices, are likely to be hit the hardest by this price spike, Mhango said. in a note to customers.
Egypt, the biggest wheat importer, got 86% of its supplies from Russia and Ukraine in 2020. Kenya and Ghana also rely heavily on imports, she said.
Ghana, where inflation in January topped the central bank’s target of 6-10% for a fifth consecutive month, is also coming under additional pressure from currency depreciation. “Countries whose currencies face depreciation pressures, such as the Ghanaian cedi, are expected to experience the largest acceleration in food inflation,” Mhango said.
DEGRADATION OF SALES
To try to contain the impact of soaring petrol prices, Mhango expects Kenya to delay removing a fuel subsidy that has kept costs artificially flat since November. This will crowd out spending on education, health and infrastructure and potentially widen the budget deficit, she said.
Nigeria, which suspended its plan to remove a fuel subsidy in July, is expected to see its fiscal gap for 2022 widen to 4.7% of gross domestic product against a government forecast of 3.4%, it said. she declared.
Oil-importing countries on the continent are likely to face pressure on their current account balances. The most vulnerable are those with overvalued currencies like the Kenyan shilling, according to the research note.
Yet Nigeria and Angola derive more than 90% of export earnings from crude and are expected to see their current account surpluses rise in 2022, as are metal commodity suppliers South Africa and Zimbabwe.
While foreign direct investment from Russia represents less than 1% of the continent’s total, according to fDi Intelligence, African nations with mining operations owned by companies in the country include Angola, Guinea, Zimbabwe, Sudan and Nigeria. They are likely to be hit hardest by the sanctions, according to the research note.
In Guinea, Russian aluminum giant United Co. Rusal International PJSC invested heavily to extract the West African country’s abundant iron ore and bauxite reserves and, in May, the diamond producer Alrosa PJSC has increased the number of exploration grants it holds in Zimbabwe.