Exchange Rate Management in Liberalising African Economies

Abstract

Until quite recently almost all African countries operated fixed exchange rate regimes, either unilaterally or as members of the Franc Zone. Economic reform, particularly in formerly socialist countries such as Ethiopia, has usually led to abandonment of fixed exchange rate systems, often under pressure from donors. It is, obviously, not inevitable that liberalisation should involve the giving up of the fixed exchange rate policy, but there are several reasons for focusing on this case. First, in most African countries the fixed exchange rate regime was in many ways the centrepiece of the control regime: it was the decision to maintain an overvalued exchange rate that made the adoption of other controls (foreign exchange rationing, import licensing and, in many countries, price controls) almost inevitable. In view of the prominent position of the exchange rate regime, it would be extraordinarily difficult for a government to achieve credibility for its liberalisation programme if it were to maintain a fixed exchange rate. For example, at present the Zimbabwean liberalisation programme is not fully credible precisely because the Central Bank has recently (February 7) made it clear that it intends to maintain something like a fixed exchange rate regime.