African local currencies: headache or opportunity?

The volatility of African local currencies often has far-reaching impacts on inbound tourism and can lead to major challenges but also to profitable opportunities for tour operators.

Zambian tour operators and tourism service providers breathed a sigh of relief earlier this month when the ban on U.S. dollars (USD) for domestic transactions was lifted, saying that this would stabilize prices for tourism products and boost tourism to the country. South African tour operators, on the other hand, are reaping the benefits of a continuously depreciating South African currency, which has made holidays increasingly cheaper for their international clients. So, which offers the better option for American travelers: quoting in foreign currency or in USD? Both have upsides and downsides, say industry players.

DorineReinsteinOne of the upsides of quoting in a local currency is that when the currency depreciates considerably, as is the case with the South African rand, is that it is offering profitable opportunities for tour operators and product owners wanting to draw tourism to the country. Results of the recent Tourism Business Index, a study conducted by the Tourism Business Council of South Africa, show that the weak exchange rate in South Africa has led to strong overseas leisure demand, which in turn has had a significantly positive effect in lifting business performance.

“A weak rand to the dollar definitely helps attract more Americans to visit South Africa due to lower prices for vacation packages,” said Jim Holden, president of African Travel Inc. He adds: “In our presentations to interested clients, we emphasize the huge value for money right now with Americans traveling to South Africa being able to enjoy dinner in a five-star restaurant for much the same price as going to a chain restaurant in the U.S. such as McDonalds! Similarly, we point out that a bottle of world-class wine from the New World’s oldest wine region in Stellenbosh is a fraction of the price of a similar wine from the Napa Valley wine region of San Francisco.”

Craig Beal, owner of Travel Beyond, explains that the weak rand has definitely shifted some of the market share from USD-based countries to South Africa. He says: “We quote our clients in foreign currency when we have to pay for accommodations in foreign currency. Therefore, any package priced in rand is indeed cheaper to a savvy client that calculates the U.S. dollar cost at the current exchange rate.”

However, local African currencies can also be a headache for tour operators when the foreign currency gains against the USD in the time between the deposit and the final payment, according to Beal.

He says: “For example, if we quote a client on a 100,000-rand safari for the middle of 2015 they are going to pay us a $2,500 deposit at today’s exchange rate (25% of 100,000 rand at 0.10 USD per 1.00 rand). In the client’s mind, at the time of deposit they owe us $7,500 for final payment even thought their invoice and documents says 75,000 rand. If, before their final payment, the rand strengthens to 0.125 USD per 1.00 rand (8 to 1), the client will owe us $9,375 for final payment. They may get upset.”

For the Zambian tourism industry, the volatility of the rate of exchange proved to be too much of a hassle, and they have welcomed the government’s decision to lift the USD ban for domestic transactions. Karien Kermer, managing director of Wildside Tours & Safaris in Livingstone, explains the previous USD ban within the country has been a huge challenge for the tourism industry as tourism service providers were suddenly exposed to major foreign-exchange losses arising from the volatility of the rate.

Kermer explains the ban didn’t mean that tour operators could not receive USD from outside the country, but all the transactions had to be approved by the Bank of Zambia. It also meant that Zambian companies had to be invoiced in Zambia kwacha by other Zambian operators. She said: “With the fluctuations of the kwacha against the USD, the smaller middleman was heavily affected, especially since the pricing of tourism products or packages is usually advertised internationally six to 18 months in advance.”

Holden also admits that Zambia insisting on travelers using local currency added unnecessary inconvenience to purchasing visas at the border, souvenirs in the country and tipping staff at camps and lodges. He says: “Bearing in mind that most safaris are sold fully inclusive of meals and drinks, very little cash is required by travelers other than the three items mentioned above, which can be handled in dollars if permitted.”