Exchange Rate Liberalization in Selected Sub-Saharan African Countries Successes, Failures, and Lessons

IMF Working Papers, January 31, 2013

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Many sub-Saharan African (SSA) countries liberalized their economies in the 1980s and early 1990s.
The paper reviews foreign exchange regime reforms in selected SSA countries, and the associated macroeconomic policies and economic performance during and after these reforms.
Before liberalization, most reviewed countries were characterized by:
- Extensive foreign exchange rationing,
- Sizeable black market premiums,
- Declining per capita real income.
After successful reform, the reviewed countries that implemented reforms successfully exhibit:
- Rationing and parallel market spreads are a distant memory,
- Per capita income has increased sharply.

Foreign exchange regime reforms in selected SSA countries:
- Examination of the nature and sequencing of exchange rate liberalization measures.
- Analysis of associated macroeconomic policies during reform episodes.
Economic performance during and after reforms:
- Assessment of outcomes for exchange markets (rationing, parallel markets).
- Assessment of macroeconomic indicators such as per capita real income and inflation dynamics (headline inflation, inflation rate).
Institutional and market features considered:
- Multiple currency practices,
- Auction market mechanisms,
- Managed float vs. adjustable peg arrangements,
- Overvalued exchange rates and exchange rate depreciation episodes.

Subject areas: Currency markets, Exchange rate arrangements, Exchange rates, Financial markets, Foreign exchange, Inflation, Multiple currency practices, Prices.
Keywords (as listed): adjustable peg, auction market, country, Currency markets, exchange rate, Exchange rate arrangements, exchange rate depreciation, exchange rate liberalization, Exchange rate regimes, Exchange rates, government, growth, headline inflation, inflation, inflation rate, managed float, overvalued exchange rate, per capita income, proceeds, reforms, stabilization effort, structural adjustment, Sub-Saharan Africa, U.S. dollar, U.S. dollar exchange rate, WP.

Pre-reform commonalities across reviewed SSA countries: extensive rationing, large parallel market spreads, falling per capita real incomes.
Post-reform outcomes in successful cases: elimination of foreign exchange rationing and parallel market spreads, marked increases in per capita income.
The paper links reform design and accompanying macroeconomic policies to heterogeneous outcomes across countries.

IMF Working Paper No. 2013/032 — Nils Øyvind Mæhle and Haimanot Teferra, January 31, 2013.