Africa's non-oil commodity exports are inelastic
It has now been close to two years since several African nations saw serious devaluation in their currencies. However, it is now clear that these devaluations have not enabled companies across several African countries to grow their exports.
A small-scale farmer in South Africa has recently accessed foreign commodity markets by way of an international distributor. (Siyabonga Sishi/Reuters)
Devaluations seemingly have done little so far to generate growth in non-oil commodity exports. The devaluations which have ranged from 19% - 78% against the US dollar since late 2021, have signaled something quite disturbing. For many of these African nations, not only have exports not grown, their weaker currencies have made imports more expensive, and propelled inflation.
Even in countries that have a large tourism sector, significant devaluations have not led to a surge in tourists. This includes Egypt, for example. The reasons for this, in part, is the ongoing war between Russia and Ukraine, that has reduced tourism inflows. Maybe, global tourism has yet to rebound post COVID as well.
While significant devaluations not achieving upticks in tourism flows can be logically explained; how can there be no gains, or even loss of exports, with national currencies becoming so much cheaper?
This has but one explanation. This can only mean that African manufacturing is dependent on a big part of their supply chains being imported. That is, you need imported raw materials to make a finished product. Significant devaluations mean that the cost of these imported intermediate inputs, required to make a final product, are now more expensive. So, all devaluation has done is to raise the cost of production of manufactured commodities, making them less exportable.
Couple this with the reality that every Asian country, and not just China, is rapidly expanding their export base, selling much higher quality goods, than what you can buy from an African source. It isn’t just higher quality goods, it’s also economies of scale. Countries like China have export strategies that lead them to produce in such high volumes that make it very difficult to compete on price. You can only compete with higher quality, to justify a higher price substitute. As most African manufacturing remains embryonic, and does not have economies of scale, this makes exporting a bigger challenge.
So, now what? Clearly, this is not a singular African nation problem, but a continent wide challenge. One way forward is to push aggressively on advancing the African Continental Free Trade Agreement. Supply chains need to be developed within the African continent, even possibly within the framework of a common currency like the Euro. Significant investments in identifying Africa’s manufacturing comparative advantage needs to be studied, and economies of scale need to be built. But, all of this will take decades. If you don’t start now, you will fall further behind, and further devaluations that are meant to promote exports may continue to have the exact opposite effect.