February currency review

Having chased its own tail for many months now, Nigeria might finally have caught it. In June last year, the central bank broke the naira's long-standing peg to the US dollar and hugely devalued it. But the government's fright at the extra inflation caused by the weaker currency meant it failed to fully remove controls. The naira didn't float freely, as promised, therefore, and official exchange rates rapidly diverged from slumping black-market ones again. A further smaller devaluation was tried in December, but again it was not a full flotation and ignored other essential steps needed to support the currency.

So, to the latest move, which began on 30 January (just after our last round-up) when the central bank removed all remaining controls and genuinely allowed the naira to float freely. The market's initial response was to sell off the currency and bring its value down to levels available on the streets. However, since 21 February it appears to have found its feet and has even regained some of the value lost earlier in the month. Overall, the naira was down 42% against the euro. It has also kept pace with the black market, which, if the float is allowed to continue, may soon have no need to exist. At the same time, the central bank raised interest rates sharply and began negotiations with the World Bank for funds to ease hard-currency shortages. These measures, alongside an official naira valuation that can at last be trusted, might just kickstart the long hoped-for surge in foreign investment that would keep the naira, and the economy, on a firmer footing.

Both South Sudan and Zimbabwe, February's other biggest currency losers, have taken steps in the last few years to loosen central-bank control over currency values, but unfortunately neither has done much else to stabilise plummeting exchange rates. In particular, export industries need to be aggressively promoted (exports bring in vital hard currencies), but you can't achieve much along those lines without attracting lots of foreign investment. Allowing your currency to float freely according to market sentiment might be an essential part of the fix, but without other reforms such as Nigeria has just made, that sentiment will remain extremely negative and currencies will continue to dive. Expect further appearances in the table above by the South Sudanese pound and Zimbabwe dollar, therefore (although it looks like Zimbabwe is about to reimpose controls). On the other hand, and with a bit of luck, the Nigerian naira might soon be showing up in our next table instead.

Only one other currency, the Chilean peso, fell more than 3% against the euro in February. This was something of a surprise because copper (Chile's primary export) prices went up notably during the month and normally that means a strong peso. However, devastating forest fires, El Nino's inflationary impact on food prices and a larger-than-expected cut in interest rates combined to weaken the currency.

Zambia is another of the world's big copper exporters and its currency, the kwacha, did benefit from rising prices in February, not least because it also made a huge new copper discovery.

The Kenyan shilling advanced nearly as much as the kwacha, with the Nairobi government having promoted a successful debt issue which will see off the threat of defaulting on repayments, at least for now.

In other currency news, the World Bank has strongly urged Bangladesh to float the taka and unify official and unofficial exchange rates. If the country follows the advice a big devaluation will be needed.

The International Monetary Fund, which has been proposing even more forcefully the same solution for economic problems in Egypt, has at last had its wishes granted. Just as we were going to press, Egypt announced a 40% devaluation of the pound against the dollar. The exchange rate has moved from USD 1 / EGP 30 to EGP 50 and the central bank said it would allow the currency to trade freely according to the market from now on. The pound's loss of value happened too late to be included in this month's tables and will be accounted for in next month's round-up.

Finally, Kosovo has banned use of the Serbian dinar, raising tensions with resident Serbs in the country.

Here is our usual selected currency movements table: