Geremi Njitap.
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Saturday, June 19, 2010
Tuesday, June 15, 2010
Friday, June 11, 2010
0 Euro-FCFA: When Good News Are Bad News
Par Africa:
A month ago when the Euro fell below 1.25$, many African countries in the zone franc interpreted this fall as a good sign for their exports. Their interpretation was based on the fact that, under normal circumstances, a fall in the value of a country's currency will lead to a rise of its exports.
But we are not in normal circumstances: the global economy in barely out of the financial crisis and there is a possibility of a double dip recession; the Europe is facing deep troubles and the Europe Union is in uncharted waters, unemployment still rising and consumer confidence is steady if not falling; the government in China is battling with inflation and they are doing everything to curb it even if that means imposing capital control; the US economy has started creating jobs but unemployment is still very high- above 10% - consumer demand is low and deficit hawks are making headway in gripping the white house agenda.
These circumstances are not normal, and because of that, the depreciation of the euro might not boost our exports as much as we think. On the contrary, by sliding further, the exchange rate Euro/USD will be detrimental to African countries in the zone franc.
To understand why, let’s take an example: if the price of a Euro/USD is 1.32$ the economic equilibrium is reached and the equilibrium quantities are exported. If the price of a Euro/USD falls to 1.25$ the maximum quantities are exported. Now, if the price falls below 1.25$, quantities exported do not change: that is, at a Euro/USD price of 1.25$ or below, the quantity exported is perfect inelastic.
The more the euro fall, the closer we get to the price at or below which quantities exported are perfectly inelastic. In other words, a continuous fall in the value of the euro will generate less revenue and will probably lead to a deficit of the balance of trade.
One more reason why we do not need a weak euro is that, most of sub-Saharan exports are primary goods; the demand for primary goods derives from the demand for manufactured goods. The supply of primary goods tends to be perfectly inelastic in the short-term.
Given that supply of primary goods is perfectly inelastic in the short-term and knowing that the current demand for manufactured goods is weak, primary goods prices will decline independently of the exchange rate due to:the lack of conservation capacity, the internal competition among producers and, producers’ current and urgent need for revenues.
Now, if the exchange rate falls and if the demand for primary goods stays weak, prices will still decline for the same reasons previously mentioned. However, producers will get fewer revenues in terms of prices and fewer revenues in terms of currencies.
Because inputs used by producers are bought both in dollars and in Euros and taking into account that the exchange rate Euro/CFA is fixed, all else being equal, to produce a given amount of primary goods would cost more and would be less profitable for countries in the zone franc.
So, under the current conditions, a depreciation of euro against other currencies is bad news for African economies in zone franc and it is bad news for producers.
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