Don’t kick a man when he’s down- Meteoric rally of commodity and fiscal constraints didn’t get the memo   

4 March 2022: In an economy which is already beaten down by the coronavirus rampage, the Russian-Ukraine conflict might shatter the glass further through fiscal constraints, weaker investment flows and higher commodity costs. 

The biggest challenge is the skyrocketing prices of wheat and oil, as they have a direct impact on inflation, current-account and budget balances, said Yvonne Mhango, Renaissance Capital’s head of research for the continent.

Crude has snowballed to $120 reaching a high of almost 14 years. Wheat prices don’t seem to want to back down either, surging by 50% in the past month since 2008, as shipments from one of the world’s biggest growing areas ground to a virtual standstill. Both Ukraine and Russia export more than 25% of the world’s wheat, and the war has closed ports and halted transport affecting the supply of wheat drastically.

African nations such as Nigeria, Ghana, Egypt and Kenya, will be the most gravely hit countries from the surging prices as transport and food make up a large share of the consumer price indexes here, Mhango said in a note to clients.

In 2020, Egypt got 86% of its wheat supply from Russia and Ukraine while Kenya and Ghana are quite heavily dependent on imports, she said.

Currency depreciation is looming on Ghana, where inflation in January reached the top of the central bank’s target of 6% to 10% for a fifth straight month. “Countries with currencies that are facing depreciation pressure, such as the Ghanaian cedi, are likely to see the strongest pick-up in food inflation,” Mhango said. 

Kenya on the other hand might have no choice but to postpone the removal of the fuel subsidy to counter the soaring prices of gasoline. That will in turn impact the spending on education, healthcare and infrastructure and potentially widen the budget deficit, she said. 

Nigeria, which scraped its plan to remove a fuel subsidy in July, is likely to see its fiscal gap for 2022 widen to 4.7% of gross domestic product from a 3.4% government forecast, she said. 

Oil importing nations in the continent will have their current account balances under duress. Those most susceptible are those with overvalued currencies such as the Kenyan shilling, the research note said.

Nigeria and Angola get more than 90% of export earnings from crude and might see their current-account surpluses soar in 2022. Metal commodity suppliers South Africa and Zimbabwe would be met with the same fate.

While foreign direct investment from Russia isn’t that significant and makes up less than 1% of the continent’s total, according to fDi Intelligence, Angola, Guinea, Zimbabwe, Sudan and Nigeria, that have mining operations owned by Russian companies will be greatly affected by the sanctions. 

In Guinea, Russia’s aluminum giant United Co. Rusal International PJSC has invested heavily to extract the West Africa nation’s abundant iron-ore and bauxite reserves and, in May, diamond producer Alrosa PJSC increased the number of prospecting grants it holds in Zimbabwe. 

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