Yahya Adul-Azizz Jemus Junkung Jammeh, the President of The Gambia, recently conducted what amounts to a fine object lesson in the futility of politicians trying to stick their fingers in the dyke to hold back currency flows. Confronted with what looked a lot like the onset of hyperinflation, with The Gambian Dalasi leaking value rapidly against foreign currencies in general, the Office of the President issued a decree aimed at preventing the hoarding of foreign currency:
"It has come to the attention of the Office of the President that speculators and some unscrupulous businesses are creating an artificial shortage of foreign exchange especially of the United States Dollar thereby causing its unprecedented appreciation against the Gambian dalasi with the sole intention of hiking prices of basic commodities and causing hardship to the people.
"Those involved in foreign exchange transactions including the Bureau de Change or Foreign Exchange Bureaus, Banks and Mobile Telephone Operators, are hereby warned that very drastic action will be taken against any individual, or body corporate found culpable of hoarding of and speculating in foreign exchange..."
Eh? Run that by me again, you might say... wondering how such an Alice in Wonderland decree would pan out in practice. The answer, of course, is "badly". But before we get to that, the problem that The Gambia was facing in terms of Dalasi depreciation, was not minimal. According to the Central Bank of The Gambia, "As at end-December 2011, the Dalasi weakened against the US Dollar by 7.7%, by 6.9% against Sterling and 8.8% against the euro, by comparison with December 2010." The bank also points out that despite the depreciation of the Dalasi, inflation weakened through 2011, down to 4.4% from 5.8% in December 2010. Food price inflation, which had been running at 8.3% in 2010 dropped to 5.7%. The GCB's monetary policy committee was so encouraged by this that they knocked 1% of the headline policy rate, down to 13%.
The real reason for the Dalasi's depreciation appears to be the classic one, with the CB printing money at the pleasure of the ruling class. The same baleful effects happen with money printing irrespective of whether the government is running the printing presses to line the pockets of top officials, or whether it is trying to keep funds flowing to support major projects without risking angering the people by raising taxes. Print and spend, for whatever reason, plays havoc with a currency's value once people start to twig that this is what is going on.
What the President's decree did accomplish, much to the outrage of Gambian citizens, was to "rob the Diaspora", in the words of one Gambian. If an ex-pat Gambian sends dollars or Swedish Krona or whatever back to The Gambia, and the official exchange rate is artificially pumped up in favour of the Dalasi by Government decree, the poor person making the exchange gets considerably less Dalasi than they were expecting, and the state pockets the difference. A decree that sets a bogus exchange rate simply encourages the very hoarding behaviour that the President was railing about in the first place. Why exchange at a silly rate? You are better off holding on to your foreign currency, ie hoarding it, in the hope that currency rate controls will crash and burn, and you'll get a better value later.
Fortunately, in the face of rising public outrage, President Jammier backed down and brought his little experiment in managed exchange controls to an end. The IMF almost immediately sent a team across to The Gambia to see what, if any, lasting damage had been inflicted on the country by the relatively brief imposition of currency controls. The IMF team made no secret of their pleasure that common sense had been restored:
"The recent directive by the Office of the President on the exchange rate and shipments of U.S. dollars led to some disruptions in the foreign exchange market and created uncertainty about The Gambia’s exchange rate policy. The mission welcomes the recent lifting of the restrictions imposed by the directive and the renewed commitment to a flexible, market-determined exchange rate policy, which has helped the foreign exchange market to largely return to normal conditions. Nevertheless, full confidence will return to the market only as the Central Bank of The Gambia (CBG), which is responsible for exchange rate policy, continues to implement this policy framework."
A free translation reads: "Thank God the President saw sense in time, and that only minor damage was done - next time leave monetary policy decisions to the central bank of Gambia!"
The depressing thing about this is the extent to which it shows that politicians can behave like young children, with each generation needing to be taught basic lessons over and over again. Still, that's what the IMF is for, in a way... It might not get there in time to stop the initial foolishness, but it can read stern lectures in private post the event. Sometimes even politicians listen.
Further reading on emerging economies
- Future Directions: The Global Economy After the Crash, by Arun Motianey
- Deleveraging, Deflation, and Rebalancing in the Global Economy, by Paul Brain and Laurie Carroll
- Why Turning Growth into Profit Is Challenging for Asian Economies, by Peter Elston
Tags: Africa , Central Bank of The Gambia , Dalasi , developing world , diasphora , hyperinflation , IMF , inflation , monetary policy , President Jammeh , The Gambia