With investors increasingly bullish on Africa, the time should be ripe for African central banks to come up with a long-term view on exchange rate policies.
Stable exchange rate regimes are essential to ensure competitiveness and to continuously attract foreign capital. This is precisely why African countries began liberalising their foreign exchange regimes in the 1990s and that the difference between the official and parallel exchange rates became minimal relatively quickly.
Another direct result is that two decades on we are witnessing improved growth rates as well as per capita income across most of Africa. With more investors looking at the continent every day, a long-term view on exchange rate policies might become crucial to entice the more reluctant among them and reduce the lingering anti-export bias. Many structural reforms are already in place clearing the way for exchange rate liberalization.
A stronger foreign exchange regime should additionally encourage increased domestic investment. Domestic investment is necessary to create employment, which is not growing quickly enough in Africa according to the IMF (2012) . This is one of the reasons that African leaders all agreed on the establishment of a continental free trade area during the last African Union Summit. Intra-African trade definitely needs to be boosted in order to maintain the continent’s current (and stellar) growth. The reason that exchange rate policies are top of the African Union’s list for next year’s summit is a clear sign that everything is coming together quite nicely.
Africa is after all “on the brink of an economic take-off, much like China was 30 years ago” (World Bank 2011).