Devaluation Cure : A Bitter Pill for Sick Money in Black Africa

The motorcade speeds down the center of Uganda’s chewed-up highways these days with flashing lights, parting the traffic with an escort of army trucks that sprout soldiers and automatic rifles.

“That’s His Excellency, Mr. Money,” one motorist grumbled as the caravan passed by.

Uganda’s newly minted cash, in cardboard boxes still bearing the stamp of the English printer, is being chauffeured around the country to replace the old bills that, President Yoweri Museveni himself said, were “almost worthless.”

Uganda’s old shilling had been trading on the flourishing black market for 10 times less than its official value. The new and devalued shilling is getting more respect, something exceedingly rare for the national currencies of Africa.

All Currencies Not Equal

Far, far from the home of the mighty dollar, in the land of the Zambian kwacha, the Ghanaian cedi, the Mozambican metical, the Nigerian naira, the Gambian dalasi, the Ethiopian birr, the Botswana pula and the Guinean syli, it is quickly evident that all the world’s currencies are not created equal. In fact, much of it literally isn’t worth the paper it’s printed on.

In the southern African nation of Mozambique, for example, the metical was devalued recently against the dollar, from 40 to $1 to 220 to $1. Yet the easily accessible black market rate is 1,600 to $1.

“You can use meticals in the bathroom, they’re worth so little,” one international expert in African finance said. The U.S. Embassy encourages travelers outside Mozambique’s major cities to carry “readily convertible currencies,” such as American dollars.

In West Africa, Liberians need a strong back and well-sewn pockets to carry their currency, one-dollar and five-dollar coins slightly larger than the U.S. half dollar. One bank in Monrovia, the capital, had so much Liberian cash on hand not long ago that officials worried that the stocks of it stored on the second-floor might crash through the ceiling.

Most of black-ruled Africa is in serious financial trouble these days. Paying interest on their international debt gobbles up as much as half the hard-currency earnings of some nations. To lower those payments, African leaders must convince Western lenders that they are on the road to recovery.

But having too much Mr. Money that is worth too little is one of the biggest obstacles to recovery. Overvalued national currencies have over the years discouraged export agriculture and local manufacturing, keeping many resource-rich African nations underdeveloped and dependent on loans and handouts.

Now, however, for the first time since the years when most of Africa gained its independence, governments on this continent are allowing their unrealistic exchange rates to fall. Currency rates are being put up for official auction, pegged to “baskets” of various hard currencies or simply devalued by presidential decree.

Bitter IMF Medicine

Currency devaluation is invariably the cure prescribed by the International Monetary Fund, the lender of last resort for beleaguered economies. In all, 25 countries in Africa are taking the IMF’s free-market medicine for recovery, although not always with a smile: The IMF stamp of approval is a necessity for rescheduling debts or borrowing money.

Recent devaluations in Nigeria and Ghana, as part of so-called structural adjustment programs, already have begun to correct economic imbalances. Even Tanzania, the birthplace of African socialism, has devalued its currency as part of a recovery plan designed on the principles of Western capitalism.

But the IMF plans have not worked everywhere. Zambia, racked by food riots and labor strikes, recently revalued its currency, abolished its foreign exchange auction and broke with the IMF. Many countries applauded Zambia, but none has followed suit.

Africa’s currencies are sometimes called “soft” because they cannot be freely converted into “hard” currencies outside the country in which they were issued. Hard currencies, on the other hand, including U.S. dollars, British pounds, French and Swiss francs, German deutsche marks and Japanese yen, can be used to buy any currency in the world, anywhere in the world.

Worthless Outside Country

An African traveling outside of his country, for example, finds that his shillings or cedis or rupees are virtually worthless. Even changing them to dollars at home is difficult.

Kenyan law, for example, allows citizens to exchange their shillings for up to $200 each year. That policy is one of the most liberal on the continent, but $200 does not last long in the United States or Europe.

In addition, money is expensive to produce, and most African countries thus make it illegal to take more than a few dollars’ worth of local currency out of their borders. Uganda spent as much as $10 million printing its new money. Liberia had 80 million new five-dollar coins minted last summer at a cost of nearly $1 million.

African governments need hard currencies--foreign exchange--to buy and import the things that they do not make, from cars and toasters to canned soup and Scotch whisky. They earn that foreign exchange through exports, tourist revenue and foreign investment in their countries.

One of the strangest currencies in Africa until a few weeks ago was the shilling in Uganda, a fertile East African nation savaged since independence by power-hungry dictators, the most brutal of whom was Idi Amin.

Tale of Uganda Shilling

A couple of months ago the American dollar was worth 1,400 Ugandan shillings at a bank here --and 14,000 shillings on the kibanga , or black market. Inflation was rampant, at nearly 200%, as prices tried to keep up with the unofficial rate.

The largest denomination bill was worth less than a dollar. An American $50 bill bought an inch-thick stack of Uganda’s paper shillings, too much to stuff into a billfold.

The problem is magnified because most of Africa’s economies deal mainly in cash; checking accounts are relatively rare and credit cards worthless outside the continent’s largest cities. One Western diplomat remembers lugging an extra briefcase filled with Ugandan shillings along on his trips into the country.

“I felt like a drug dealer going off on a buy,” he said. “but it just covered my fuel and meals.”

Radical Plan Devised

Museveni, Uganda’s president since 1986 and himself a university-trained economist, devised a radical plan with the help of the IMF to rescue Uganda’s economy. The Ugandan currency was replaced by new bills with higher values but lower numbers. One new shilling was issued for every 100 old shillings: 1,000 shillings became 10 shillings, 5,000 shillings became 50 shillings, and so on. Museveni said the public will no longer “have to carry huge bundles of currency for simple transactions.”

At the same time, he set the exchange rate at 60 shillings to $1, a 75% devaluation, and ordered the changes to take place over a few weeks of May and June.

In the ensuing confusion, some merchants have been price-gouging, and the prices of imported goods such as soap and fuel have tripled overnight. But the plan has quickly turned some dividends for Uganda’s economy, Western economic analysts here say. For one thing, Ugandans are saving the new shilling, which, the analysts say, is implicit recognition that it has value.

On the black market, where traders find business pretty slow these days, the new shilling, printed in red, green and blue notes, has been dubbed the “Museveni dollar.”

Self-Image a Factor

For years, exchange rates were entwined with the self-image of the continent’s leaders. To have a currency that fell in value was demeaning, a sign of failure. So the exchange rates were simply set at a fixed level--and forgotten.

“The attachment to a number in Africa goes well beyond the attachment you see anywhere else in the world. They like their exchange rates to stay stable,” a World Bank official in East Africa said.

An exception is the franc zone, the 14 former French colonies whose currencies, African francs, are tied to the French franc at a rate of 50 to 1. These African francs are, in effect, freely convertible into French francs.

In most of the rest of Africa, however, the U.S. dollar is the pre-eminent foreign currency. Even British citizens traveling in former British colonies find the greenback more readily accepted than the pound sterling.

In Liberia, the West African nation founded by freed American slaves, the Liberian dollar is, officially at least, worth $1. In fact, both the Liberian coin and the American bill are considered legal tender there, although Liberia’s dollar has no value beyond its borders.

Dollar Goes Into Hiding

When Liberian President Samuel K. Doe refused to devalue his currency in the face of economic trouble last year, it blew American dollars out of circulation and into hiding with all the force of an African sandstorm. Within weeks, there was no U.S. currency to be found.

Nobody except the government thinks that Doe’s dollar is equal to a U.S. dollar any more. Two American dollars will buy three Doe dollars on the black market in Liberia today. A foreigner who writes a personal check on an American or European bank for his groceries receives automatic 10% discounts at some stores.

The Chase Manhattan Bank office in Liberia recently refused to accept one million Liberian coin dollars as payment for an outstanding loan. A Liberian court backed the bank up, ordering the payment made in U.S. dollars.

‘African Socialism’ Blamed

Many Western financial experts blame the currency woes of black-ruled Africa on nearly two decades of “African socialism,” the brainchild of one of the continent’s most respected statesmen, former Tanzanian President Julius K. Nyerere.

That system was characterized by government control. Exchange rates, farm prices and wages were set by governments. Everything from hotels to factories to airlines were owned and operated--usually inefficiently--by governments.

“The sad thing is that African countries built the notion of central planning into their societies for ideological reasons, and then it got entrenched,” said a British economist who has spent two decades working as a consultant to African governments.

In the years following independence, the true value of Africa’s currencies tended to fall, but the official values were kept high.

Leaders Afraid to Act

Urban dwellers, especially the elite, grew accustomed to inexpensive imports and low fixed prices for food. Leaders then became afraid to act, knowing that the seeds of revolutions and coups are sown in urban areas. Shortly after Ghana devalued its currency in the early 1970s, its leader was unseated by a coup.

Soon, black markets for currency began to appear. They reflected the true rate; Western economists even refer to the black market value of a currency as its “equilibrium rate.”

The artificially low exchange rates made imports cheap and stifled local production. Governments, in effect, subsidized the rate, paying the difference out of their own meager foreign exchange earnings.

Tanzania has been steadily devaluing its shilling, but it remains overvalued by at least 100%. A new pulp mill was built in Tanzania recently, with the help of international aid agencies, to produce paper for the country’s schools. But the ministry of education still imports paper more cheaply.

Some Take Advantage

When foreign exchange is cheap, it soon becomes scarce. And those sitting closest to the till are tempted to take advantage.

The governor of the central bank in one East African nation grants himself a license to buy foreign exchange and treats himself to a new Volvo every year, at a price lower than the Swedish automobile sells for in Europe.

When an African currency gets in trouble, the currency of the nearest stable neighbor is pressed into service. The Kenyan shilling, for example, was used widely in Uganda and some parts of Tanzania until recent improvements in those economies.

In the deteriorating economy of war-torn Mozambique, restaurants and shopkeepers often demand American dollars or goods for barter.

How and How Much?

While most African countries have softened their rigid stands on exchange rates, deciding how, and how much, to devalue without causing political and economic turmoil has not been easy.

Sierra Leone and Nigeria have allowed their currencies to drop farther and faster than most countries on the continent. One U.S. dollar buys 30 leones today; last year it bought six leones. One Nigerian naira, worth $1 last summer, buys about 20 cents today in the country’s new foreign exchange auction.

The process of overhauling wobbly economies has required larger sacrifices than some leaders are willing to make.

Zambia’s widely respected president, Kenneth Kaunda, recently scrapped the IMF-inspired currency auction that had devalued Zambia’s kwacha. He “revalued” Zambia’s currency, setting the exchange rate at 8 kwacha to $1. The rate set at auction had been 21.

15 Killed in Riots

Kaunda took the step after 15 people were killed during food riots in the country’s copper belt in December, nurses and teachers went on strike and widespread unhappiness with the austere economic reform program became evident.

Trying to cut its budget deficit, as suggested by the IMF, Zambia had lifted a subsidy on cornmeal, in effect doubling its price, and touching off the disturbances.

Many of Africa’s leaders have publicly and privately applauded Kaunda’s decision to spurn the IMF. They believe that the IMF medicine is too bitter and threatens to trigger political instability all across the continent.

“The IMF is demanding too much, too quick,” a former IMF economist in Africa agrees. “It takes a lot of political courage to readjust an economy. You almost need a dictator to pull you through.”