Navigating High Inflation in Africa: Solutions for Wealth Preservation

Inflationary pressures, driven by factors like excessive money printing and political instability, significantly impact global economies. Those across Africa are no exception. As a Nigerian, entrepreneur, and investor understanding high inflation's ramifications is crucial. I’m even more dedicated to understanding its nuances as I support global investing across Africa (EMEA) at Alpaca as their Executive Sales Director.

Let’s explore the challenges African consumers face and the evolving strategies they employ to safeguard their wealth.

Understanding High Inflation in African Economies

High inflation refers to a rapid and uncontrollable increase in prices, leading to a sharp decline in the purchasing power of the local currency. In African economies, high inflation often stems from a combination of factors including: excessive money printing by governments, fiscal deficits, political instability, and economic mismanagement.

Many African countries including Nigeria, Ghana, Egypt have grappled with high inflation in recent years – with Zimbabwe dealing with hyperinflation in recent years. The period between 2000 and 2008 was marked by extreme hyperinflation in Zimbabwe, with prices doubling every 24.7 hours at its peak. In Nigeria, we've also experienced significant inflationary pressures, with an inflation rate exceeding 30%. Whereas in Ghana and Egypt, inflation has also been high at 45% and 32% respectively.

Inflation in African countries and other emerging markets often accompanies currency devaluation, driven by the need for large imports to sustain populations and drive economic growth. Despite efforts like dollarization in countries like Zimbabwe and the Democratic Republic of Congo, inflation remains high across many African nations, particularly exacerbated by the COVID-19 pandemic.

Hyperinflation has far-reaching consequences, impacting various sectors of society. In Zimbabwe, hyperinflation contributed to food insecurity, high unemployment rates, and a decline in the education sector. Similarly, in Nigeria, high inflation has led to increased prices of our essential goods and affecting sectors such as affordable housing.

Drilling into Consumer Challenges

Preserving wealth amidst high inflation poses significant challenges for consumers, particularly in African economies like Nigeria. The erosion of purchasing power and savings is a primary concern, as the value of local currency rapidly depreciates. Obviously, this makes it difficult for anyone to maintain their standard of living and save for the future.

Africa’s next generation entering the workforce is acutely aware of global opportunities, products, and experiences, many of which are priced in foreign currencies like the US dollar. This global awareness highlights the stark contrast between the cost of goods and services in local earnings. For example, it's easy to calculate how much an iPhone, a train ticket, or even a restaurant meal costs in USD compared to our Naira.

This combination of increased consumer expectations and lower earnings creates a significant gap that traditional wealth management methods struggle to address. As a result, many consumers are turning to more sophisticated wealth management solutions to preserve their wealth and hedge against the effects of high inflation. These solutions provide a way for individuals to protect their savings and maintain their purchasing power in the face of economic instability.

Strategies for Wealth Preservation

African investors facing high inflation employ various strategies to safeguard their wealth amidst economic instability. These strategies reflect a journey of increasing awareness and sophistication in managing financial resources effectively.

One approach has been investing in tangible assets like real estate, gold, or other commodities in the local markets. These assets tend to retain their value even during periods of high inflation, providing a hedge against currency depreciation and erosion of purchasing power.

Diversification across different currencies or foreign accounts is another strategy. By spreading their wealth across multiple currencies (USD, GBP, EUR) investors seek to mitigate the risks associated with domestic currency devaluation. This approach helps preserve value in the face of fluctuating foreign exchange rates.

The flight to safety often begins with minimizing volatility by holding USD as a stable reserve currency. Investors often choose to hold USD as a preferred currency for wealth preservation, driven by factors such as:

1. Stability: The USD is renowned for its stability compared to local currencies prone to hyper inflationary pressures. By converting wealth into USD-denominated assets, individuals can shield their savings from the erosion of purchasing power caused by rapid inflation.
2. Global Acceptance: The USD enjoys widespread acceptance in international trade and finance, making it a convenient and accessible currency for wealth preservation purposes. Its liquidity and fungibility facilitate seamless transactions and asset transfers across borders.
3. Diversification: Holding USD provides diversification benefits, allowing individuals to spread their currency risk and reduce exposure to fluctuations in local currency values. Diversifying into USD assets helps mitigate the risks associated with hyperinflation and currency devaluation for international economies.
   

Some opt for newer, alternative stores of value, such as cryptocurrencies or foreign stocks, like US equities. Cryptocurrencies, in particular, have gained popularity as decentralized and inflation-resistant assets that offer a hedge against hyperinflation and currency devaluation. Despite the volatility seen in this asset class, I’ve observed that African investors are open to this due to its potential upside for appreciation. There is regulatory promise with South Africa leading the charge by issuing over 50 crypto licenses already. Both Nigeria and Kenya are also at developed stages of drafting their policy and issuing licenses.

Implications for Fintech Broker

In the face of high inflation, fintech brokers serving African markets have a unique opportunity to leverage technology and innovative solutions to address the challenges of wealth preservation for their clients.

One key advantage of fintech platforms is their ability to provide access to a wide range of investment options. This includes foreign currency based investments (US equities) and alternative, digitally-native assets (cryptocurrencies). By leveraging technology, fintech brokers can develop user-friendly interfaces and seamless transaction processes, making it easier for clients to invest in dollar-denominated assets.

Furthermore, fintech brokers play a crucial role in opening global access to wealth preservation solutions. Unlike traditional brokerage firms, which may have high entry barriers and complex processes, fintech platforms offer accessibility and convenience to a broader segment of the population. This accessibility is particularly important in inflationary environments, where individuals seek efficient and transparent avenues to protect their wealth from currency devaluation.

However, fintech brokers must navigate regulatory considerations and compliance requirements effectively. Regulatory frameworks may vary across jurisdictions, necessitating careful adherence to local laws and regulations. Fintech brokers must prioritize compliance and transparency to build trust with clients and regulatory authorities, ensuring the integrity and security of wealth preservation solutions offered on their platforms.

In the local context of African markets, like Nigeria, Ghana, and Kenya, customers increasingly view saving and investing in dollar-denominated assets as a core need. Legacy brokerage firms are addressing this demand by expanding the availability of dollar funds for investment. However, fintech companies are leading the charge by providing accessible interfaces and innovative investment products to simplify the process of getting started with wealth preservation.

What’s Next

Inflation, especially when considered hyperinflation, poses immense challenges for all global economies, as seen across Africa. Zimbabwe and Nigeria's experiences highlight the widespread impact on essential sectors and the erosion of purchasing power for consumers.

To combat these challenges, consumers are adopting sophisticated wealth preservation strategies, including investing in digitally-native assets and diversifying across currencies. Fintech brokers play a vital role in providing access to these investment vehicles, leveraging technology to offer diverse options and transparent processes.

However, navigating regulatory landscapes remains crucial for fintech firms, ensuring compliance and trust in wealth preservation solutions. As African consumers increasingly seek US dollar-denominated assets, fintech companies lead in offering innovative products to meet evolving needs.

Looking to connect with Tosin?

Securities brokerage services are provided by Alpaca Securities LLC ("Alpaca Securities"), member FINRA/SIPC, a wholly-owned subsidiary of AlpacaDB, Inc. Technology and services are offered by AlpacaDB, Inc.

Cryptocurrency services are made available by Alpaca Crypto LLC ("Alpaca Crypto"), a FinCEN registered money services business (NMLS # 2160858), and a wholly-owned subsidiary of AlpacaDB, Inc. Alpaca Crypto is not a member of SIPC or FINRA. Cryptocurrencies are not stocks and your cryptocurrency investments are not protected by either FDIC or SIPC. Please see the Disclosure Library for more information.

This is not an offer, solicitation of an offer, or advice to buy or sell securities or cryptocurrencies, or open a brokerage account or cryptocurrency account in any jurisdiction where Alpaca Securities or Alpaca Crypto respectively, are not registered or licensed, as applicable.

Please note that this article is for general informational purposes only and is believed to be accurate as of posting date but may be subject to change.