Choice of exchange rate regimes for African countries: Fixed or Flexible Exchange rate regimes?

The choice of an appropriate exchange rate regime has been a subject of ongoing debate in international economics. The majority of African countries are small open economies and thus where the choice of the exchange rate regime is an important policy issue. Aside from factors such as interest rates and inflation, the exchange rate is one of the most important determinants of a country’s relative level of economic health. For this reason, exchange rates are among the most watched analyzed and governmentally manipulated economic variables. This paper revisits the debate on the choice of an appropriate exchange-rate regime for African countries. It starts by reviewing literature on the debate of appropriate exchange rate regimes. It then discusses relevant considerations for the choice of the exchange rate regimes for African countries. The debate revolves around the effect of exchange rate on macroeconomic management, particularly inflation and export competitiveness. The paper recommends the conventional peg arrangement as a viable option for the majority of low-income African countries. But this is contingent on a number of important pre-conditions. For middle-income African economies, with relatively developed financial markets and linkages to modern global capital markets, floating arrangements, including the managed floating exchange rate regime, look more promising. In conclusion, the paper cautions that no single exchange rate regime is right for all countries or at all times.