In the 1980s, most African countries adopted Structural Adjustment Programmes (SAPs).
The objective was to correct the “erroneous industrial, trade, and exchange rate policies” pursued by the countries in the 1970s and before.
Liberalisation, devaluation of domestic currencies, stabilisation, and privatisation have become the core mantras of most African countries.
These were undertaken through the prescription and sponsorship of the International Monetary Fund (IMF), the World Bank, and donor countries.
However, Africa’s socioeconomic conditions worsened by the day due to weak productive capacities and a lack of structural economic transformation.
These challenges were further compounded by an unfavourable international environment, such as unsustainable debt, depressed prices for the continent’s exports of unprocessed commodities, and continued deterioration of the terms of trade (ToT).
Consequently, Africa’s share in global trade and investment flows continued to precipitously decline from the already low levels, the continent's dependence on external aid increased, the generalised poverty situation continued to pose unparalleled challenges, and its marginalisation in the global economy continued unabated.
In short, the SAPs failed to deliver on their promises of sustained economic growth, employment creation, poverty reduction, and development on the continent.
Interestingly, as with the African economies, most Asian countries were also prescribed SAPs.
However, these did not deter their accelerated transformation, continued growth, and development of, particularly, East Asian economies.
While country-specific situations and economic structures differ between and within African and Asian countries, diverse factors have led Asian economies to success.
These include selectivity of prescribed adjustment policies, prudence (implicit rejection of what was not feasible), pragmatism in policy choice, and forward-looking strategies in implementing development policies.
In the process, the Asian economies fostered requisite productive capacities, expanded production and productivity, accelerated industrialisation, and technological catch-up.
They emerged as manufacturing-export-investment-led economies in the world with expanded employment, substantially reduced poverty, and significantly improved living standards for their citizens.
Contrary to the Asian economies, competitive devaluation of domestic currencies pursued as part of SAPs in Africa failed to boost exports, curtail imports, and ensure macroeconomic stability as claimed by sponsoring institutions and financing developed economies.
Instead, Africa’s imports continue to balloon against sluggish exports. This puts the trade balance in permanent and structural deficits, declining international reserves, mounting external indebtedness, galloping and hyperinflation, and worsening overall socioeconomic conditions.
Inflation pressures have ceased as economic problems but have spiralled into political phenomena. Suppose policymakers and politicians want to end monetary inflation.
In that case, they must foster economy-wide productive capacities, kickstart structural transformation, and continuously improve production, productivity, macroeconomic stability, and political governance.
Lessons from earlier exchange rate adjustments in Africa
The classical cases of Ghana and Zimbabwe are worth highlighting.
In Ghana, the Cedi was 3 to the US$ in the early 1980s. Following the IMF/World Bank-sponsored SAPs in 1983, the rate hit 30 Cedi for US$1 in 1984-1985.
In subsequent years, Cedi continued to collapse, reaching an average of 10,000 to a dollar in 2006.
Hyperinflation hit the economy, sending shockwaves to other macroeconomic fundamentals and forcing the Ghanaian government to redenominate the currency in 2007.
This was done by eliminating four zeros and pegging Cedi to the US$ as per the IMF article 8(4). Since then, the Cedi stood at 15 to US$1, and it has been performing better than most currencies in sub-Saharan Africa.
Consequently, Ghana’s export earnings reached US$20 billion in 2023, outstripping the country’s imports worth US$19 billion the same year. However, it took over 40 years for Ghana to stabilise its external balance.
Likewise, the Zimbabwean dollar (ZWD) was one of the stable currencies in Africa in the 1980s.
The official exchange rate went from 3.60 ZWD to US$1 in 1980 to 69 billion ZWD in 2007.
This, combined with unseen hyperinflation rates in economic history, led to the partial dollarisation of the economy in 2009. With the deepening crises and continuing collapse of the country’s currency, quadrillion ZWDs were worth only US$5 when converting bank deposits into US$-US$denominated accounts at the time of dollarisation.
At this point, 100 billion ZWDs were needed to buy three eggs from the market.
This year, Zimbabwe changed its currency once again and introduced a free-floating exchange rate regime backed by the price of gold. How far the new currency (ZiG) holds will be seen sooner rather than later.
The lesson from the episodes of past exchange rate adjustment policies is that they failed to ensure macroeconomic stability but, instead, aggravated the vicious cycle of depreciation-inflation-macroeconomic instabilities.
New waves of free-floating and conditionality, and what is subsequent?
The new waves of market-based and internationally imposed exchange rate adjustments (free-floating) raised questions about whether African countries are in the New Structural Adjustment Programmes (NSAPs).
Undoubtedly, dynamic, evidence-based, and results-oriented macroeconomic policies are vital for developing countries, including Africa.
However, Africa’s past attempts to correct distortions in macroeconomic fundamentals through exchange rate adjustments dismally failed to achieve positive outcomes.
This was due to “accidental” policy prescriptions, erroneous sequencing, lack of capabilities to implement policies effectively, and an unfavourable global environment.
Increased policy conditionality to access concessional loans to finance development proved challenging for African countries.
African countries needed to learn more from their vigorously pursued failed adjustment policies. There is convincing evidence that several countries are falling back into the complex and vicious traps of externally imposed policies.
These, combined with the continent’s sluggish external sector, mounting indebtedness, and systemic and persistent macroeconomic instability, may push the countries into difficult socioeconomic conditions.
Unfortunately, the new policy prescriptions are not limited to exchange rate adjustments. Instead, they include the removal of state subsidies, reducing and harmonising tariffs and taxes on imported goods and services, tightening fiscal and monetary policies, privatising State-Owned Enterprises (SOEs), and deepening institutional and regulatory reforms.
The following are a few examples to cite regarding newly introduced exchange rate adjustments:
- Since 2012, Malawi has been facing challenging socioeconomic conditions. To address socioeconomic and environmental vulnerabilities, Malawi has been negotiating loan terms and conditions amid low levels of economy-wide productive capacities, mounting external debt, and systemic and structural challenges facing its economy, including inflation, unemployment, and generalised poverty.
In 2012, the Government liberalised the foreign exchange regime, devalued the kwacha by 33 per cent, and adopted a “de jure floating regime” in return for an “Extended Credit Facility” from the IMF.
This was followed by a further 25 per cent devaluation of the kwacha in 2022. However, Malawi’s socioeconomic conditions worsened further with stagnant growth, unsustainable debt, increased unemployment, continued consumer price index (CPI) increase, and intensified poverty.
The Malawi kwacha continued to depreciate from 60mwk in 2000 to US$ 1 to 1,730mkw in 2024.
- Nigeria is another country that free-floated the Naira in 2023. The naira fared well at 197 to US$1 for a few days. It quickly hit 500 and is now trading above 1,650 for a dollar.
The falling Naira, the removal of fuel subsidies, and astronomically rising consumer prices pushed discontented Nigerians to the streets, where they protested the government's austerity measures and policies.
Whether the civil strike continues and worsens, the already deleterious situations will be seen sooner rather than later. - Ethiopia is the first country to have a free-floating foreign exchange regime (since 29 July 2024). Therefore, the impact of this policy change is still being assessed.
However, judging by the depreciation-inflation trends, there are growing concerns about the broader implications of this bold decision.
In a few weeks of free-floating, the Birr has already lost more than 60 per cent of its value, and reportedly, prices of household consumer items and critically essential supplies such as medicine have begun to soar.
There are growing concerns that the decision to free-float Birr may lead to adverse socioeconomic conditions.
This is mainly due to Ethiopia's inflationary situation, weak productive capacities, high dependence on imports, depletion of the international reserves, external indebtedness, and challenging political instabilities.
- Other African countries that historically introduced “imperfect free-floating” include Egypt (since 2016), Gambia, Kenya, Uganda, South Africa, and Zambia.
The move is imperfect because markets are not perfectly competitive, monetary policies are not autonomous, macroeconomic fundamentals are unstable, and institutions need to be stronger in African economies. - Unlike the countries mentioned above, Algeria, Morocco (since 2018), Mauritius, and Tunisia continue to follow managed floating. Similarly, francophone countries members of the West African Economic and Monetary Union-WAEMU pegged the regional currency CFA to the French franc previously and now to the EURO.
Conclusions
The prevailing situations are different in such heterogeneous groups of countries. This notwithstanding, in theory, foreign exchange policies are supposed to control inflation, ensure much-needed macroeconomic stability, and arrest deteriorating terms of trade.
However, such policies could neither tame inflation nor stabilise fundamentals in African economies.
Industrialisation continued to be sluggish, terms of trade continued to decline precipitously, structural transformation remained elusive, and poverty reduction continued to pose daunting challenges in almost all sub-Saharan African countries except Mauritius and South Africa.
Therefore, five key messages follow from the above discussions:
First, free-floating should not be seen as a remedy for Africa’s structural development challenges;
Second, learning from the experiences of successful Asian economies, free-floating may not work in isolation from monetary policy autonomy and the absence of clearly defined inflation-targeting. This means that it should be seen as a short-term intervention.
Third, free-floating has caused havoc in Ghana, Zimbabwe, and recently, Malawi and Nigeria. Thus, it did not work in Africa or Asia because the latter group of countries moved to managed floating and gradually free-floating after accelerating their development processes.
Fourth, currency policies must be crafted exclusively based on domestic macroeconomic fundamentals.
From available experiences thus far, it is clear that the choice of a particular foreign exchange regime and the optimal exchange rate should be predicated on domestic socioeconomic fundamentals and political conditions.
Economic policies, including exchange rate regimes, should not be dictated or prescribed from outside and must be consistent with a nation's overall development objectives.
Fifth, decisions to use currency policy as part of macroeconomic policy and the case for selecting a given exchange rate regime should be informed by research, technical knowledge, and a transparent flow of market information.
Finally (sixth), there should be clarity on the causes and effects of exchange rate policy choices, the desired objectives, benefits, and costs, and their links to other policy instruments to hedge eventual risks and uncertainties.
African countries should prioritise fostering economy-wide productive capacities and negotiate long-term lending to support these priorities.
No nation has ever developed without investing in productive capacities and kick-starting the process of structural transformation.Mussie Delelegn Arega (PhD)
Every nation has developed by unleashing human, natural, and physical capital and creating a vibrant and dynamic private sector, which should be at the core of production transformation in African economies.
Agricultural production and productivity revitalisation, fostering backward and forward intersectoral linkages, ensuring food security, and substituting imports must be pursued widely and vigorously. Conducive political, monetary, and microeconomic environments should supplement these.
In other words, the seriousness of the complex development challenges facing African countries requires a new development model because cosmetic and business-as-usual approaches to development failed to deliver on their promises of transformation and inclusive growth.
The latest development model must focus on tapping the comparative advantages of respective countries while relieving vital binding constraints to economic diversification, value addition, and overall development.
This cannot be done in an environment where the role of the private sector is marginal, the share of manufacturing value added in GDP is in steep decline, the quality of education is weak and not aligned with the needs of the economy, R&D facilities are underfunded, electricity outages are more frequent, and the potential of ICTs is yet to be fully harnessed due to weak ICT infrastructure such as the lack of secure internet servers and limited broadband internet connectivity.
Africa also needs to expand policy space and autonomous monetary policy more today than ever. These should include building domestic capacities to formulate home-grown development policies and bolster capabilities to implement them through domestic resources.
Dependence on Official Development Assistance (ODA) and borrowing will compromise the independence of monetary and fiscal policies. Learning from the experiences of Asian countries, if a country pursues a fully flexible exchange rate policy, it should be able to pursue a fully autonomous monetary policy.
This is key to limiting the extent to which domestic interest rates are affected by economic developments abroad.
Moreover, African countries need effective inflation-targeting policies that include the independence of the National Bank in monetary policymaking.
*** The Reporter Magazine first publishes this newspaper article. It is prepared fully considering ST/AI/2000/13 section 2 and is in the author’s capacity. Therefore, the opinions expressed in this article are the author’s own and do not reflect or represent the official views of UNCTAD or the United Nations. The author can be reached at ([email protected]).
