December currency review

Devaluing your country's currency is a bold step for any government. It usually causes more inflation (which may already be high) by making imports more costly. But devaluations are also done for good reasons. They nearly always come after central-bank control of a currency's value has overvalued it. An overvalued currency is an unattractive buy and investment often falls because of it, bringing economic problems. It also incentivises a black market to develop where fairer exchange rates can quickly diverge from official ones. This then sets up opportunities for corruption. So, the bold decision to devalue is made to solve all these things and if it achieves that, then the short-term pain of higher inflation is usually worth it.

The trouble is, an extraordinary number of governments, having decided a devaluation can no longer wait, pull back at the last minute and either fail to fully unify official and illicit exchange rates or reimpose controls, overvaluing the currency again and undoing the good work. By doing one or other of these things, the pain of higher inflation is still inflicted but almost nothing is solved. Argentina has just done both.

Few politicians sound bolder than Argentina's new president, Javier Milei. Since taking office in early December, he has introduced schemes to slash government spending, staff numbers and fuel and energy subsidies, forcing the economy and Argentina's long-suffering people to swallow the harsh medicine he promised during his election campaign. Perhaps the medicine will work, but it will take time (possibly more time than Milei will have in office, if history is anything to go by) and cause more pain than it alleviates in the short term at least.

Regarding the peso, while Milei's boldness might have seemed intact, in reality it was half-hearted. Yes, he devalued the official exchange rate by more than half (from USD 1 / ARS 366 to ARS 800 between 12th and 14th December), but this left rates far short of black-market ones, and he immediately reimposed central bank control of the currency's value in relation to the US dollar, promising only a further 2% depreciation each month. So-called 'blue dollar' rates available on the streets are around USD 1 / ARS 1000. So, what has Milei's currency reform solved? With the official exchange rate still 20% overvalued, foreign investors and lenders remain unlikely to take a chance on Argentina; the black market will continue to flourish; and the huge difference between official and illicit rates still allows big hedging opportunities for corrupt operators.

What the devaluation will do, of course, is raise inflation even higher, with many forecasters suggesting the consumer price index will at least double. If such a partial devaluation inflicts this anyway, why not go the whole way and devalue fully? By unifying official and unofficial rates and then letting them float freely of central-bank control, the black market would no longer need to exist, chances to hedge would disappear and investors might just begin to trust the value of your money.

The strange thing is, it costs a lot more money to keep controlling a currency value than to let it float, and money is the one thing debt-laden Argentina needs much more of, as Milei's other cost-cutting reforms clearly show.

The second biggest faller in December was the Nigerian naira. Authorities in Nigeria engineered a similar devaluation to Argentina's in June 2023, when they briefly unified official and unofficial exchange rates. However, having said it would allow the naira to float from then on, in reality the central bank has only let the currency trade within a restricted band, quickly overvaluing it again and forcing another sizeable devaluation in December. The latest official exchange rate is USD 1 / NGN 897, whereas divergent black-market rates are around USD 1 / NGN 1220. Inflation increased after the June reform and is likely to rise again following the latest move, but the problems caused by an overvalued official exchange rate seem sure to stay.

Despite the issues caused by artificially controlling currency values, India too may be doing just that. The International Monetary Fund has reclassified Delhi's currency regime as a 'stabilised arrangement' which is no longer 'floating'. If India is preventing the rupee from moving much against other currencies, as the IMF alleges but which India denies, it will be interesting to see if a black market develops there and what other difficulties such a policy might bring. We will of course monitor the situation in the months and years ahead.

As the table above shows, only one currency, the Norwegian krone, gained more than 3% against the euro in December.

Foreign assignees in Myanmar, and indeed anyone else there, can now change foreign currencies into kyat at a preferential rate of USD 1 / MMK 2900 as long as they use officially-sanctioned online platforms to do so, following a major reform. Remittances into Myanmar will still be converted to kyat at the official rate of USD 1 / MMK 2100.

Finally, here is this month's selected currency movements table: