The African Currencies and Their Exchange Rate Volatility
Dr. Wolassa L. Kumo
December 29, 2008
1.Introduction
Africa is believed to be not only the origin of mankind but also the origin of currency. The earliest currency used in commercial transactions appeared in Egypt and Mesopotamia by the third millennium BC [1]. Later the Chinese, and the Greek and Roman Financiers contributed to the development of modern currencies. In particular, the Chinese are credited for the earliest development of paper money. The first recorded use of paper money was in China during the reign of emperor Wu-Ti in the second century BC [2] while the widespread official use of paper money in the country was recorded during the period 10th -15th century AD [1]. The first paper money in Europe was issued by the Swedish bank in 1661. However, many of the units of currency in use today derive from Roman originals, and more specifically from versions of the Roman coins minted during the Middle Ages [1].
The modern currency (money) is the lifeblood of an economic system. It serves as the medium of exchange, a unit of account and a store of value. Apart from this, the global Foreign Exchange Market is one of the biggest markets in the world in terms size and scope. Some estimates indicate that globally, over 3 trillion US dollar currency exchanges take place every day. The trade in foreign exchange includes both spot trading and forward deliveries. The purposes of the trade include financing of foreign investments, loans, trade in goods and services, and currency speculation. Therefore, a sound and stable currency and monetary system is a prerequisite for the stability and the development of global economies. In particular, currency stability is essential for investment in both developing and developed economies.
Between 1870 and 1914 there was a global fixed exchange rate or pegged system. Under this system, most central banks supported their currencies with convertibility to gold. This period was known as the Gold Standard. This allowed for unrestricted capital mobility as well as global stability in currencies and trade [4]. However, the Gold Standard had several weaknesses. For instance, an increased import from abroad could easily run down the gold reserve required to support the money, leading to diminishing money supply, increased interest rate and slowing economic activities and even recession [3]. The Gold Standard, was however, abandoned with the onset of WWI but readopted back after the war only to be abandoned again in early 1930s following the Great Depression.
The Bretton Woods agreement of 1944 helped to establish a fixed exchange rate in terms of gold for major currencies. The objective was to generate global economic stability and increased volumes of global trade. To attain this objective the Intentional Monetary Fund (IMF) was also established during the same year [4]. The Bretton Woods fixed exchange rate system continued until the early 1970s when the floating exchange rate was adopted by most countries.
Since the collapse of the Bretton Woods system, the IMF members have been free to choose any form of exchange arrangement they wish (except pegging their currency to gold): allowing the currency to float freely, pegging it to another currency or a basket of currencies, adopting the currency of another country, participating in a currency bloc, or forming part of a monetary union [5]. And since 1985 all attempts to move back to global peg based on gold were completely abandoned.
However, some governments may choose to have a "floating," or "crawling" peg, whereby the government reassesses the value of the peg periodically and then changes the peg rate accordingly usually through devaluation. This method is often used in the transition from a peg to a floating regime [4]. The peg has worked in creating global trade and monetary stability when all the major economies were a part of it while a floating regime, though not without its flaws, has proven to be a more efficient means of determining the long term value of a currency and creating equilibrium in the international market [4].
At present, most African countries follow floating or managed float exchange rate regimes. However, the ensuing exchange rate volatility (risk) in some African countries has seriously affected their economic performances. There are as many currencies in Africa as the number of countries. Except the Communaute Financiere Africaine franc (XOF) or (XAF), or CFA franc, for short, there are limited currencies of regional significance in the continent. The multiplicity of currencies and limited monetary and economic integration puts the continent at a disadvantage especially during the time of global economic shocks such as the current global economic crisis.
2. Currencies in Africa
Currencies in Africa can be broadly divided into two Zones. These are: CFA franc zone and non CFA franc zone. The CFA franc zone comprises of countries in Western and Central Africa that use CFA franc XOF and XAF respectively as the common currency. The CFA franc currency zone include 14 African countries. These are: Benin (XOF), Burkina Faso (XOF), Cameroon (XAF), Central African Republic (XAF), Chad (XAF), Republic of Congo (XAF), Cote d´Ivoire (XOF), Equatorial Guinea, (XAF), Gabon (XAF), Guinea–Bissau (XOF), Mali (XOF), Niger (XOF), Senegal (XOF), and Togo (XOF).
Other countries in the continent use own individual currencies. These include, Algerian dinar, Angolan kwanza, Botswana pula, Cape Verde escudo, Comoran franc, Congolese franc (DRC), Djibouti franc, Egyptian pound, Eritrean nakfa, Ethiopian birr, Gambian dalasi, Ghanaian cedi, Kenyan shillings, Lesotho loti, Liberian dollar, Libyan dinar, Malagasy ariary, Malawian kwacha, Mauritanian ouguiya, Moroccan dirham (also used by Western Sahara), Mozambique metical, Namibian dollar, Nigerian naira, Reunion euro, Rwandan franc, Sao Tome dobra, Seychelles rupee, Seirra Leone leone, Somali shillings, South African rand, Sudanese dinar, Swaziland lilangeni, Tanzanian shillings, Tunisian dinar, Ugandan shillings, Zambian kwacha and Zimbabwean dollar.
The bank responsible for the CFA franc (XOF) and (XAF) is the central bank of western and central African states while individual national banks are responsible for the currencies of other countries in the continent. The 52 African countries listed above use about 39 different currencies. The multiplicity of currencies in the continent is one of the major bottlenecks for faster sub regional and continental economic integration. Sub regional trading blocks in the continent should seriously consider monetary integration on top of their common tariff agenda.
3. The Volatility (risk) of African exchange rates
The CFA franc zone exchange rates exhibited higher level of volatility in the continent compared to other currencies. Between November 2007 and December 2008, the value of CFA franc against the USA dollar fell from 453.40 to 521.80 per US dollar. That is the nominal CFA franc has depreciated by about 15 percent against the US dollar during the past year alone with a considerable volatility during the period. Currency depreciation is usually considered to be good for exports because it promotes the competitiveness of the domestic exporters by reducing the price of exported goods in terms of the local currency. However, since recently economists are concerned about the stability of the local currency instead of the absolute fall or rise in the values of a currency at a given point in time.
Recent empirical evidence has shown that exchange rate volatility, i.e. frequent upward or down ward movements in the exchange rates negatively affect exports and economic growth. Empirical evidence for five emerging Asian economies indicated that exchange rate volatility has a negative impact on the exports of these countries [6].
Apart form this, exchange rate volatility may reduce investor confidence and may curtail the inflow of foreign direct investment. This is particularly true for Africa where the inflow of FDI is already very little.
Outside of the CFA franc currency zone, Western and Southern African currencies exhibited higher level of volatility during the past year. For instance, the Ghanaian cedi fell from 9325.20 in November 2007 to 12, 231.71 per US dollar in December 2008. During the one year period under consideration, the nominal cedi depreciated by 31 percent. The Ghanaian new cedi, old cedi divided by a thousand unit, fell from 0.93 to 1.22 per US dollar, with the nominal value depreciating by the same percentage point. However, the new cedi is one of the strongest currency units in the continent and hence the impact of its volatility on the economy will be smaller compared to the volatility of the old cedi.
The other volatile currency in the continent during the period under consideration was, the Zambian kwacha which fell from 3707 to 4575 per US dollar implying the deprecation of nominal value by about 23% between November 2007 and December 2008 and with a considerable volatility during the 12 month period.
Other currencies in the continent whose exchange rates depreciated and were volatile during the year include, Algerian dinar, Comoros franc, DRC franc, Botswana pula, Gambian dalasi, Guinea franc, Kenyan, Ugandan and Tanzanian shillings, Lesotho loti, South African rand, Namibian dollar, Madagascar ariary, Sao Tome dobra, Seychelles rupee, Ethiopian birr, Sudanese dinar, Swazi lilangeni and Somali shillings among others.
The only currency in the continent that showed a marginal appreciation in nominal values was the old and new Mozambique metical. The value of the latter per USdollar increased from 25.69 in November 2007 to 24. 53 in December 2008. The rate was also relatively less volatile compared to many other African currencies.
The most stable currencies during the period under review were Angolan new kwanza, Egyptian pound, Eritrean nakfa (which was fixed at 15 nakfa per US dollar), Libyan dinar, Nigerian naira, Tunisian dinar and Rwandan franc.
The most volatile currency in the continent is the new Zimbabwean dollar which, although much stronger compared to the old dollar, was highly volatile during the year and depreciated by about 176 percent between November 2007 and December 2008 reflecting the serious economic problems in the country.
4. Concluding remarks
As the origin of mankind, the continent provided the world with the earliest forms of currency. The earliest currency used in commercial transactions appeared in Egypt and Mesopotamia by the third millennium BC. Later the Chinese, as well as the Greek and Roman Financiers contributed to the development of modern currencies. In particular, the Chinese are credited for the earliest development of paper money.
Apart from its functions as the medium of exchange, unit of account and store of value, currency exchange has become one of the biggest businesses in the world. Some estimates indicate that globally, over 3 trillion US dollar currency exchanges take place every day including both spot trading and forward deliveries to felicitate foreign investments, loans, trade in goods and services, and currency speculation. .
There are about 39 different currencies in Africa. Fourteen western and central African countries use a common currency known as Communaute Financiere Africaine franc (CFA franc) managed by the central bank of western and central Africa. About 38 other African countries use individual currencies managed by their own individual central banks. During the past year, November 2007 to December 2008 the nominal exchange rates of most African currencies have depreciated and most rates were volatile.
Currencies in the CFA franc zone and other western African countries as well as currencies in the Southern and Eastern African regions were volatile and their nominal values depreciated during the year. A notable exception was the Mozambique new metical whose nominal value appreciated during the year. The most stable currencies during the period under review were Angolan new kwanza, Egyptian pound, Eritrean nakfa, Libyan dinar, Nigerian naira, Tunisian dinar and Rwandan franc.
Empirical evidence indicates that exchange rate volatility (risk) negatively affects exports and economic growth. Therefore, monetary authorities should focus on ensuring long term exchange rate stability instead of safeguarding against the rise or fall of the absolute rates.
The multiplicity of currencies in Africa is one of the serious constraints for regional economic and monetary integration. Sub regional blocks in the continent should also aim at adopting common sub regional currencies on top of common tariff.
References
1.History of money at http://www.historyworld.net/
2.History of Paper money at http://www.bportugal.pt/
3.The History of FOREX Trading at http://www.everysolutions.com/
4.http://www.investopedia.com/articles
5.IMF. The end of the Bretton Woods System (1972–81) http://www.imf.org/
6.Chit, Myint Moe, Rizov, Marian and Willenbockel, Dirk (2008): Exchange Rate Volatility and Exports: New Empirical Evidence from the Emerging East Asian Economies. Published in: Middlesex University Economics Discussion Paper No.127 (2008)
Africa is believed to be not only the origin of mankind but also the origin of currency. The earliest currency used in commercial transactions appeared in Egypt and Mesopotamia by the third millennium BC [1]. Later the Chinese, and the Greek and Roman Financiers contributed to the development of modern currencies. In particular, the Chinese are credited for the earliest development of paper money. The first recorded use of paper money was in China during the reign of emperor Wu-Ti in the second century BC [2] while the widespread official use of paper money in the country was recorded during the period 10th -15th century AD [1]. The first paper money in Europe was issued by the Swedish bank in 1661. However, many of the units of currency in use today derive from Roman originals, and more specifically from versions of the Roman coins minted during the Middle Ages [1].
The modern currency (money) is the lifeblood of an economic system. It serves as the medium of exchange, a unit of account and a store of value. Apart from this, the global Foreign Exchange Market is one of the biggest markets in the world in terms size and scope. Some estimates indicate that globally, over 3 trillion US dollar currency exchanges take place every day. The trade in foreign exchange includes both spot trading and forward deliveries. The purposes of the trade include financing of foreign investments, loans, trade in goods and services, and currency speculation. Therefore, a sound and stable currency and monetary system is a prerequisite for the stability and the development of global economies. In particular, currency stability is essential for investment in both developing and developed economies.
Between 1870 and 1914 there was a global fixed exchange rate or pegged system. Under this system, most central banks supported their currencies with convertibility to gold. This period was known as the Gold Standard. This allowed for unrestricted capital mobility as well as global stability in currencies and trade [4]. However, the Gold Standard had several weaknesses. For instance, an increased import from abroad could easily run down the gold reserve required to support the money, leading to diminishing money supply, increased interest rate and slowing economic activities and even recession [3]. The Gold Standard, was however, abandoned with the onset of WWI but readopted back after the war only to be abandoned again in early 1930s following the Great Depression.
The Bretton Woods agreement of 1944 helped to establish a fixed exchange rate in terms of gold for major currencies. The objective was to generate global economic stability and increased volumes of global trade. To attain this objective the Intentional Monetary Fund (IMF) was also established during the same year [4]. The Bretton Woods fixed exchange rate system continued until the early 1970s when the floating exchange rate was adopted by most countries.
Since the collapse of the Bretton Woods system, the IMF members have been free to choose any form of exchange arrangement they wish (except pegging their currency to gold): allowing the currency to float freely, pegging it to another currency or a basket of currencies, adopting the currency of another country, participating in a currency bloc, or forming part of a monetary union [5]. And since 1985 all attempts to move back to global peg based on gold were completely abandoned.
However, some governments may choose to have a "floating," or "crawling" peg, whereby the government reassesses the value of the peg periodically and then changes the peg rate accordingly usually through devaluation. This method is often used in the transition from a peg to a floating regime [4]. The peg has worked in creating global trade and monetary stability when all the major economies were a part of it while a floating regime, though not without its flaws, has proven to be a more efficient means of determining the long term value of a currency and creating equilibrium in the international market [4].
At present, most African countries follow floating or managed float exchange rate regimes. However, the ensuing exchange rate volatility (risk) in some African countries has seriously affected their economic performances. There are as many currencies in Africa as the number of countries. Except the Communaute Financiere Africaine franc (XOF) or (XAF), or CFA franc, for short, there are limited currencies of regional significance in the continent. The multiplicity of currencies and limited monetary and economic integration puts the continent at a disadvantage especially during the time of global economic shocks such as the current global economic crisis.
2. Currencies in Africa
Currencies in Africa can be broadly divided into two Zones. These are: CFA franc zone and non CFA franc zone. The CFA franc zone comprises of countries in Western and Central Africa that use CFA franc XOF and XAF respectively as the common currency. The CFA franc currency zone include 14 African countries. These are: Benin (XOF), Burkina Faso (XOF), Cameroon (XAF), Central African Republic (XAF), Chad (XAF), Republic of Congo (XAF), Cote d´Ivoire (XOF), Equatorial Guinea, (XAF), Gabon (XAF), Guinea–Bissau (XOF), Mali (XOF), Niger (XOF), Senegal (XOF), and Togo (XOF).
Other countries in the continent use own individual currencies. These include, Algerian dinar, Angolan kwanza, Botswana pula, Cape Verde escudo, Comoran franc, Congolese franc (DRC), Djibouti franc, Egyptian pound, Eritrean nakfa, Ethiopian birr, Gambian dalasi, Ghanaian cedi, Kenyan shillings, Lesotho loti, Liberian dollar, Libyan dinar, Malagasy ariary, Malawian kwacha, Mauritanian ouguiya, Moroccan dirham (also used by Western Sahara), Mozambique metical, Namibian dollar, Nigerian naira, Reunion euro, Rwandan franc, Sao Tome dobra, Seychelles rupee, Seirra Leone leone, Somali shillings, South African rand, Sudanese dinar, Swaziland lilangeni, Tanzanian shillings, Tunisian dinar, Ugandan shillings, Zambian kwacha and Zimbabwean dollar.
The bank responsible for the CFA franc (XOF) and (XAF) is the central bank of western and central African states while individual national banks are responsible for the currencies of other countries in the continent. The 52 African countries listed above use about 39 different currencies. The multiplicity of currencies in the continent is one of the major bottlenecks for faster sub regional and continental economic integration. Sub regional trading blocks in the continent should seriously consider monetary integration on top of their common tariff agenda.
3. The Volatility (risk) of African exchange rates
The CFA franc zone exchange rates exhibited higher level of volatility in the continent compared to other currencies. Between November 2007 and December 2008, the value of CFA franc against the USA dollar fell from 453.40 to 521.80 per US dollar. That is the nominal CFA franc has depreciated by about 15 percent against the US dollar during the past year alone with a considerable volatility during the period. Currency depreciation is usually considered to be good for exports because it promotes the competitiveness of the domestic exporters by reducing the price of exported goods in terms of the local currency. However, since recently economists are concerned about the stability of the local currency instead of the absolute fall or rise in the values of a currency at a given point in time.
Recent empirical evidence has shown that exchange rate volatility, i.e. frequent upward or down ward movements in the exchange rates negatively affect exports and economic growth. Empirical evidence for five emerging Asian economies indicated that exchange rate volatility has a negative impact on the exports of these countries [6].
Apart form this, exchange rate volatility may reduce investor confidence and may curtail the inflow of foreign direct investment. This is particularly true for Africa where the inflow of FDI is already very little.
Outside of the CFA franc currency zone, Western and Southern African currencies exhibited higher level of volatility during the past year. For instance, the Ghanaian cedi fell from 9325.20 in November 2007 to 12, 231.71 per US dollar in December 2008. During the one year period under consideration, the nominal cedi depreciated by 31 percent. The Ghanaian new cedi, old cedi divided by a thousand unit, fell from 0.93 to 1.22 per US dollar, with the nominal value depreciating by the same percentage point. However, the new cedi is one of the strongest currency units in the continent and hence the impact of its volatility on the economy will be smaller compared to the volatility of the old cedi.
The other volatile currency in the continent during the period under consideration was, the Zambian kwacha which fell from 3707 to 4575 per US dollar implying the deprecation of nominal value by about 23% between November 2007 and December 2008 and with a considerable volatility during the 12 month period.
Other currencies in the continent whose exchange rates depreciated and were volatile during the year include, Algerian dinar, Comoros franc, DRC franc, Botswana pula, Gambian dalasi, Guinea franc, Kenyan, Ugandan and Tanzanian shillings, Lesotho loti, South African rand, Namibian dollar, Madagascar ariary, Sao Tome dobra, Seychelles rupee, Ethiopian birr, Sudanese dinar, Swazi lilangeni and Somali shillings among others.
The only currency in the continent that showed a marginal appreciation in nominal values was the old and new Mozambique metical. The value of the latter per USdollar increased from 25.69 in November 2007 to 24. 53 in December 2008. The rate was also relatively less volatile compared to many other African currencies.
The most stable currencies during the period under review were Angolan new kwanza, Egyptian pound, Eritrean nakfa (which was fixed at 15 nakfa per US dollar), Libyan dinar, Nigerian naira, Tunisian dinar and Rwandan franc.
The most volatile currency in the continent is the new Zimbabwean dollar which, although much stronger compared to the old dollar, was highly volatile during the year and depreciated by about 176 percent between November 2007 and December 2008 reflecting the serious economic problems in the country.
4. Concluding remarks
As the origin of mankind, the continent provided the world with the earliest forms of currency. The earliest currency used in commercial transactions appeared in Egypt and Mesopotamia by the third millennium BC. Later the Chinese, as well as the Greek and Roman Financiers contributed to the development of modern currencies. In particular, the Chinese are credited for the earliest development of paper money.
Apart from its functions as the medium of exchange, unit of account and store of value, currency exchange has become one of the biggest businesses in the world. Some estimates indicate that globally, over 3 trillion US dollar currency exchanges take place every day including both spot trading and forward deliveries to felicitate foreign investments, loans, trade in goods and services, and currency speculation. .
There are about 39 different currencies in Africa. Fourteen western and central African countries use a common currency known as Communaute Financiere Africaine franc (CFA franc) managed by the central bank of western and central Africa. About 38 other African countries use individual currencies managed by their own individual central banks. During the past year, November 2007 to December 2008 the nominal exchange rates of most African currencies have depreciated and most rates were volatile.
Currencies in the CFA franc zone and other western African countries as well as currencies in the Southern and Eastern African regions were volatile and their nominal values depreciated during the year. A notable exception was the Mozambique new metical whose nominal value appreciated during the year. The most stable currencies during the period under review were Angolan new kwanza, Egyptian pound, Eritrean nakfa, Libyan dinar, Nigerian naira, Tunisian dinar and Rwandan franc.
Empirical evidence indicates that exchange rate volatility (risk) negatively affects exports and economic growth. Therefore, monetary authorities should focus on ensuring long term exchange rate stability instead of safeguarding against the rise or fall of the absolute rates.
The multiplicity of currencies in Africa is one of the serious constraints for regional economic and monetary integration. Sub regional blocks in the continent should also aim at adopting common sub regional currencies on top of common tariff.
References
1.History of money at http://www.historyworld.net/
2.History of Paper money at http://www.bportugal.pt/
3.The History of FOREX Trading at http://www.everysolutions.com/
4.http://www.investopedia.com/articles
5.IMF. The end of the Bretton Woods System (1972–81) http://www.imf.org/
6.Chit, Myint Moe, Rizov, Marian and Willenbockel, Dirk (2008): Exchange Rate Volatility and Exports: New Empirical Evidence from the Emerging East Asian Economies. Published in: Middlesex University Economics Discussion Paper No.127 (2008)
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