June currency review

Although the kwanza's peg with the US dollar was dropped in 2019, the National Bank of Angola has since continued to intervene in markets to support the local currency. By bolstering exchange-rate values over several years, based on nothing but a government's desire to cool inflation, the currency necessarily becomes overvalued. When the costly intervention ends, as has now happened in Angola (whose oil production is falling, making market manipulation unaffordable) the currency plummets. Consequently, the kwanza fell 34% against the euro in June (see first table below), almost keeping pace with Nigeria's June devaluation (which we reported here). Such degrees of currency weakness are likely to push up already-high inflation, at least partly offsetting the downward impact on expatriate cost of living ensuing from the devaluations.

The longer a central bank controls currency values, the more painful it is when the reins are removed, as Zimbabwe is discovering. We reported on its big devaluation in May here, since when the chaos has been so severe that authorities have already backtracked on their promise to allow the Zimbabwean dollar to float freely. The result will be a freer currency regime, but some controls will remain. If they are overused and official exchange rates overvalue the Zimbabwean dollar again, the black market is sure to thrive once more and little will have been achieved.

Egypt will be watching what happens in Angola, Nigeria and Zimbabwe closely. Ideally, its central bank would also prefer to loosen controls on the Egyptian pound, so it can use foreign currency reserves more productively and remove imbalances in the economy, but so far it has only taken tentative steps in that direction. The International Monetary Fund again urged it to unify exchange rates in June. We will, of course, report back if and when it finally takes the plunge.

Meanwhile, Bangladesh vowed in June to unify its exchange rates and float the taka sometime between July and end-September of 2023, in line with IMF stipulations attached to a loan deal agreed in January. This is another one to keep an eye on. If the move happens, it is almost certain to involve a currency devaluation.

The third biggest faller in June was the Turkish lira. Following President Erdogan's recent election victory, he felt secure enough to finally admit defeat in his unorthodox methods of controlling the economy. For several years he forced the central bank to cut interest rates to try to lower inflation, whereas every other bank in the world would have raised them. Because of the damage his policy was doing to the economy, there was enormous downward pressure on the lira and the central bank had to spend huge sums in foreign exchange to keep its value from plummeting too far. The bank has now been allowed to lift interest rates to cool inflation, which should also boost confidence in the local currency, but at the same time it has stopped intervening in exchange-rate markets leaving the lira unsupported. Turkey's currency fell 24% against the euro in June, but if left to its own devices from now on it should soon find a floor and be more stable in the future, not least because sensible economics has returned to Ankara.

Another fragile currency which should be a bit more steady, though only perhaps in the short term, is the Pakistani rupee. It has fallen 33% against the euro in the last year, but the IMF agreed a USD3bn bailout with crisis-hit Pakistan in late June. Among other things, the money could be used to support the rupee's value under the central bank's managed-float regime. A more stable currency is likely, therefore, and hopefully inflation will fall, but excessive control of the rupee will overvalue it and we know how that ends.

The table immediately above shows that the leone of Sierra Leone was the world's strongest currency in June. The leone officially floats freely, but in reality its value is controlled by the central bank. The gain of 15% was engineered between 21st and 23rd of June, a few days before a disputed presidential election which narrowly returned the incumbent, Julius Maada Bio. Strengthening the currency might have been some sort of bizarre election ploy. Leaders certainly aren't immune to unorthodox methods, as we've seen with Turkey.

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