Improving exchange rate management in sub-Saharan Africa

Although focusing on SSA, the paper offers a good primer on exchange management in developing countries. The report includes an examination of the historical origins of the exchange rate debate in SSA; a review of the principles of exchange rate management in developing countries; a discussion of transition issues involved in moving from a fixed to flexible exchange rate system; a review of alternative exchange rate management regimes; the country case studies on Ghana, Senegal, Uganda, and Zambia; a discussion of the current status of macroeconomic and exchange rate management in the 46 countries in SSA; a review of the conventional arguments against devaluation and commentary questioning these arguments; and conclusions and policy recommendations. The Appendix includes an empirical analysis of devaluation and inflation in SSA based on a simple model of devaluation and inflation. The study finds that: (1) the Anglophone economies showed signs of emerging from balance of payments disequilibria only when the governments concerned abandoned efforts at administratively determining exchange rates and let the market decide; (2) donors that sought to broaden the scope of exchange rate management reform in the anglophone countries have become convinced of the desirability of short-circuiting tortuous policy meanderings and moving rapidly to market-determined exchange rates; (3) for the CFA franc zone countries, though still bound by a fixed exchange rate vis-a-vis the French franc, the January 1994 devaluation of 50% was a direct, though tardy, response to market forces, and initial signs of renewed investment and growth are positive; and (4) attempts to dampen wide gyrations in exchange rates are justifiable, but require a sophistication in management that many SSA central banks and finance ministries have forfeited by tolerating institutional deterioration. (Author abstract)