Analyzing Currency Fluctuations in Developing Nations

 “Minister of Trade and Investments, Doris UzokaAnite, highlighted in February this year that direct engagements with foreign investors have resulted in substantial interest and commitments totalling USD 30 billion since Tinubu’s inauguration. Despite these commitments, actual investments have yet to materialize due to investor apprehension over the forex market’s instability.” - Private Equity and Venture Capital Association of Nigeria (PEVCA) . In the last 18 months, the big ticket fundraises have dried up in the Nigerian startup universe. When you ask the global investors, they drop this line: I know the exchange rate I am coming in, but I am not confident what it would be when I need to take the funds out of Nigeria. Largely, the exchange rate volatility is a big problem. That is the reason why most of the investments commitments are not coming through. So, what do we do? I have three points: #1. Nigeria should understand that the Naira exchange rate volatility is more injurious to the economy than the actual exchange rate. #2. While Naira has attained near parity between the black and official/NAFEM rates, it is largely immaterial as before the float, many did not see that as a big problem. #3. Nigeria should prioritize making the Naira stable, over fighting to reduce the exchange rate. For that I have two suggestions: -Make the exchange rate to be N1,200/$ or whatever you desire. - Make it illegal for anyone in any place, and in any form, to exchange above 1,203/$ in Nigeria. If Nigeria can do that, arbitrage will go and Naira will breathe because roundtripping will disappear. The major economic challenge in the nation today is the volatility of the Naira. Interestingly, Nigeria can solve that problem within 24 hours, and bring calm in the economy.

Examining current market trends, it becomes a moral dilemma to feel excitement when the exchange rate is high, especially amidst challenging circumstances in one's home country. In discussions with an IMF friend today, the impact on businesses in Zambia is challenging. A weakened local currency against the US dollar often leads to rising prices for essential goods, given the prevalence of imports priced in dollars. Obviously there’s more factors. Notably, around March this year, a 1 percentage point increase in depreciation resulted in a 0.22 percentage point inflation rise within a year across much of Africa. The pandemic-induced exchange rate depreciations contributed to a 10 percentage point increase in public debt, particularly external debt in dollars, though at a continental level, growth and inflation have somewhat constrained it to a 6 percent rise. Despite central banks' efforts to bolster currencies using reserve funds, many find their reserves dwindling, limiting further interventions. Some nations resort to measures like foreign exchange rationing, introducing distortions and corruption risks. In the face of anticipated ongoing external shocks, countries with flexible exchange rates must allow adjustments and implement monetary tightening. For those with pegged rates, alignment with the pegged currency becomes crucial. In both scenarios, fiscal consolidation is imperative to curb the increase in debt. Structural reforms also hold the potential to stimulate growth. I really hope something changes soon. - The post above represents Mulenga’s thoughts and do not represent the thoughts of the organization he represents 🚨

👇👇👇 NEW WORKING PAPER: "Asymmetric Exchange Rate Pass-Through" is available at https://lnkd.in/eZc5-HPP Using monthly data from 84 countries, this paper estimates the exchange rate pass-through into consumer prices. The investigation is achieved by the local projections method, where currency depreciations versus appreciations, high versus low inflation rates, and high versus low exchange rate volatilities are considered. The empirical results suggest that the exchange rate pass-through is higher during currency depreciations, higher inflation rates, and for countries with higher exchange rate volatilities. When alternative country groups are considered, the exchange rate pass-through estimates increase progressively from advanced to emerging to developing countries, where the highest asymmetry is observed for currency depreciations versus appreciations. These exchange rate pass-through estimates are further used in a general equilibrium model to measure the corresponding welfare costs, where it is shown that higher pass-through estimates are associated with higher (lower) welfare costs in the case of a domestic (foreign) productivity shock. Important policy suggestions follow.