In the article below, trade and exchange rate policy reform in Africa has been highlighted. It is a well known fact that exchange rates determine very important indicators in the trading sector. The exchange rates are important because it decides the incoming as well as outgoing capital flow in the economy.
Owing to exchange rates, import, export activities are affected. To obtain the optimum results from an economy, which has a dwindling exchange rate, the exchange rate requires to be judiciously exploited.
Government adopted a “trial and error” method:
Trade and exchange rate policy reform in Africa underwent many changes in the country, each time trying to re orient the policies with a view to suit the prevailing economic conditions. For instance, with regard to exchange rates in Africa, the government has embraced exchange rate regime, which were fixed to floating exchange rates. The floating exchange rate was adopted in the year 1973.
The various experimentation with exchange rates included the following:
Being pegged to single currency
Currency basket (Weighted).
Adopted the system of independent floating exchange rate.
Introduction of CMA or Common Monetary Area.
However, trade and exchange rate policy reform in Africa comprises one of the main changes in the economic set up of the country, which eventually affects other sectors of the economy as well. There were two prominent alterations made as part of the exchange rate policy reform in Africa.
Restrictions pertaining to foreign exchange rate were lifted.
Exchange rate policies were liberalized.
Reasons for implementation of devaluation:
The period between 1980 to 1990, witnessed devaluation of currency in the continent. There were several reasons for which these devaluations were effected. Two of the prominent ones being:
It was anticipated that in due course, there would be an increase in the competition among the trading countries.
Trading activities were also reckoned to swell as compared to before. Trade and exchange rate policy reform in Africa was also implemented as part of the SAP or structural adjustment programs.
Effects of devaluation:
As a result of the devaluation, the currency of most of the African nations fell drastically.
The devaluation process greatly affected the trading sector of the economy in the following manner:-
Efforts were made that due to devaluation, trade flows as well as all transactions pertaining to the same does not get hampered. The net worth of domestic companies in the country were also prevented from being devalued. As an aftermath of devaluation, there were many firms, which declared bankruptcy. It is also difficult for the traders who have to shell out more money due to the unstable currency of Africa. Owing to the unpredictable exchange rates, the manufacturing sector, related to trading activities also gets affected. Not only domestic trade but international trade gets adversely affected also.
Devaluation as a policy instrument:
Few questioned the feasibility of the process of devaluation as a means of controlling the economy.
The impact, which devaluation has on the economies says it all:-
If an economy permits the flexibility of real wages after devaluation, that economy would have a positive impact on devaluation. Consequently, trading activities like export as well as import would be benefited. On the contrary, if an economy is very rigid pertaining to supplies and has cost of commodities very high, it is likely that devaluation would prove to be advantageous for such a country. There is also another side of the coin. If an economy has past records of their wages being indexed, has a trend wherein the trade unions occupy a dominating position and centralized wage bargaining, there would be a tendency of the labor force in the country to prevent the real wages from falling as a result of devaluation.
Trade and exchange rate policy reform in Africa need to be executed depending on the condition of the economy and by judging how effectively as well as efficiently, a country can adapt itself to the aftermath of the changes in the Trade and exchange rate policy in Africa.
Last Updated on : 26th June 2013
Last Updated on : 26th June 2013 a