Once, extremely fragile currencies as diverse as the Algerian dinar, Nigerian naira, Tanzanian shilling, Mozambique metical, Zambian kwacha and many others, provided a one-way bet for traders. They could make quick profits by speculating on most African currencies losing value against 'hard currencies'.
During the 1990s it was quite common for major African currencies to lose 25% of their value each year. This kind of steep devaluation, in turn, hiked import prices in local-currency terms and external debt-servicing costs, i.e. requiring more in terms of local currency to repay hard-currencies debts. The value of national output also plunged when African currencies devalued year after year.
Commenting on the South African rand in December 2001 when the currency slumped to R13.85:$1, Nedcor Bank noted: "South Africans are watching helplessly as the (price tag) of our economy plummets. This has resulted in the destruction of more than R28bn in wealth." Foreign investors avoid countries with chronically weak currencies, unless, like Angola and Congo DRC, they are fortunate to possess vast mineral wealth.
Yet the past two years have seen African currencies (excluding the Zimbabwe dollar) remaining particularly firm, reflecting the green shoots of economic revival across the continent.
According to the Economist Intelligence Unit's currency index--covering about two-thirds of Africa's 53 member-countries--over the 2000-03 period, among the strongest currencies were the CFA zone (+40%), Morocco (+22%), Botswana (+22%), Tunisia (+16%), South Africa (+14%), Mauritius (+5%) and Kenya (+4%). By contrast, the Zimbabwe dollar plunged 93% during the same reporting period.
The currencies of both emerging and developed-markets are governed by a host of factors including global capital flows (both private and official), the external trade balance (the difference between the value of exports and imports), macroeconomic fundamentals (such as GDP growth and inflation differentials versus a country's major trading partners), monetary and fiscal policies, and a country's stance on foreign investments and free trade. Political stability also plays an important role in a currency's strength.
Africa's currency units should continue deriving support from favourable external factors. These include higher commodity prices, especially for precious metals and crude oil underpinned by the weaker US...