KEY POINTS:
- IMF criticizes African central banks for ineffective disposal of foreign exchange reserves
- African central banks’ rigid exchange rate regulations come under scrutiny and hinder stabilization efforts
- The IMF urges increased exports as the key to consistent foreign exchange flow in the region
The International Monetary Fund (IMF) has raised concerns over the currency management practices of African central banks, highlighting their ineffective disposal of foreign exchange reserves in attempts to regulate their currencies.
Abebe Selassie, the head of the IMF’s Department, delivered a keynote speech during the 45th Assembly of Governors Association of African Central Banks, where he criticized the rigidity of exchange rate regulations in these nations. Selassie pointed out that many central banks have predominantly responded to pressures by depleting their reserves rather than allowing controlled exchange rate depreciation. He emphasized that such measures are unlikely to address inflation or stabilize currencies effectively.
Selassie argued that this approach to exchange rate management has proven to be highly costly. He highlighted a significant decline in foreign exchange reserves across the region, which is particularly concerning given that many countries already possessed low reserves.
The resurgence of complex monetary and exchange rate policies reminiscent of the 1980s was noted by Selassie, asserting that these outdated approaches have had adverse consequences. He acknowledged the difficult choices that central banks have had to make in response to external shocks but questioned the optimality of these trade-offs.
Parallel foreign currency markets have reemerged or expanded in scope, leading to increased spreads where they already existed. Selassie urged countries in the region to prioritize boosting their exports, as this is the only reliable means of ensuring a steady influx of foreign exchange.
Despite noteworthy economic progress and improvements in various development indicators, the regional share of global exports remains disproportionately low. Selassie’s stern comments were made in the context of several nations, including Kenya, witnessing significant currency depreciations in relation to key international currencies. These concerns were voiced during the governors’ meeting as a call for more effective and sustainable currency management strategies in the region.