July currency review

The Zimbabwean dollar was the world's strongest currency during the month just gone and it isn't often you can say that. It would be nice to report that the surprising strength was due to positive economic news, but none is obvious and it appears the revaluation was a political ploy to bring down inflation ahead of forthcoming elections. Lowering inflation is usually a good thing, of course, but arguably what Zimbabwe's economy really needs is more predictability, so people and businesses can plan and invest. Unfortunately, having only recently taken the brave step of devaluing the local dollar so that exchange rates were almost at parity with those offered on the black market, the central bank has now shocked everyone by rowing back a big chunk of those losses, thereby allowing official and illicit rates to diverge sharply again. As regular readers know, widely divergent rates cause all sorts of problems for an economy and create opportunities for corruption. Whether the ruling party will be brave enough to orchestrate another devaluation following the election is anyone's guess. With luck, someone else will be making the decisions after the vote.

Nigeria also took the plunge recently to devalue its currency after many years of urging from the IMF and others. Despite suggestions that the naira would henceforth be allowed to float according to market sentiment, official (USD1/NGN770) and black-market (NGN870) exchange rates already appear to be diverging again. However, unlike Zimbabwe, whose authorities have clearly orchestrated a reversal of policy, the Nigerian central bank seems powerless to prevent illicit exchange rates from sliding away from official ones. It simply doesn't have the dollars to meet demand, forcing importers and others to turn to the black market for their foreign currency. The lack of dollars is due to a long-term decline in oil production and exports, but until foreign investors can rely on the fair value of official exchange rates, they are unlikely to provide the funds to enable oil output to rise again. 

Our table of biggest currency fallers during July includes several usual suspects, including Sierra Leone and Zambia, both of which saw market adjustments reversing gains from the month before. Meanwhile, a sharp fall in the value of the Mauritanian ouguiya, which is normally carefully managed by the central bank, suggests the country's foreign-exchange reserves may be under pressure as the current account deficit widens.

Finally, here is our regular selected currency movements table: