May currency review

Developing countries rely on imports more than richer ones and most imports are paid for in US dollars. When global crises occur, investors get nervous and move money into the safe haven that is America's currency, boosting its value and weakening all the rest. The rush to dollars is even greater when US interest rates go up, as they have recently. Poorer countries see their currencies fall and import costs rise. With the world having been in almost permanent crisis since early 2020, such currencies have been under extreme pressure for a long time. 

African currencies have been especially hard hit and in May it was the turn of Burundi and Zimbabwe to buckle. The central bank in Bujumbura, which has strictly managed the value of the Burundi franc against the dollar for many years, announced in early May that it would from now on allow market forces to determine exchange rates. Over the next two weeks, the franc fell from USD 1 / BIF 2060 to BIF 2800, losing about a quarter of its value. However, exchange rates have moved very little since the middle of the month, suggesting the bank has reimposed controls. As Burundi is desperately seeking a loan deal from the IMF, which has demanded a more flexible currency regime, authorities may be forced to loosen the reins again soon, not least because even after the devaluation, official exchange rates still overvalue the franc compared to fairer value rates (latest USD 1 / BIF 3000) available on the black market.

Zimbabwe's latest devaluation was huge, with the Zimbabwean dollar losing 45% against the euro during the month. The economy is 80% (US-)dollarised, which makes everyday commerce difficult when hard currencies are in short supply, as they are in Zimbabwe. The government last week introduced new measures to try to boost use of local dollars, but people's desperation to get hold of US dollars instead, for the simple reason that they are likely to hold their value better, adds to downward pressure on Zimbabwe's currency. Its central bank went further than Burundi's, however, moving the official rate from USD 1 / ZWL 1060 on 1 May to ZWL 1990 on 31 May, almost at parity with rates available on the black market. By doing so, if it also now allows exchange rates to move according to market forces, the bank may not need to engineer another devaluation for a long time. That's not to say the market won't continue to mark down the Zimbabwean dollar, though, while the government notably fails to develop the economy.

If Zimbabwe has now unified official and parallel exchange rates, it will be rewarded with fewer economic imbalances and opportunities for corruption, and businesses will have a better idea of what they can expect for exchange rates looking ahead. As Egypt is finding out, and Burundi might too, you can devalue as much as you like, but until you reach parity with parallel rates and allow your currency to float freely, no one knows how many more devaluations will be needed. Nobody knows where the bottom lies. Such uncertainty can be stifling for businesses and damaging for economic growth.

Another African country suffering from a strictly-controlled multiple-exchange-rate regime is, of course, Nigeria. More positively, its new president, Bola Ahmed Tinubu, sounds like he might just be serious about reforming the currency system there. If so, a meaningful, positive change would undoubtedly involve a big devaluation.

More currencies than usual made big advances against the euro in May (see next table). However, all of them belong to troubled economies and have struggled in recent months. In one way or another they enjoyed better news this time and subsequently enjoyed market corrections.

In other currency news, Bolivia's economic model and especially its currency peg to the dollar, are increasingly being questioned. Argentina, meanwhile, has introduced a raft of new measures designed primarily to avoid yet another big currency devaluation. 

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