After reading the title of today's post you may be asking yourself one or both of the following questions :1) Where the heck is Burundi? 2) Why should I care about their currency?
We'll start with the easy one. If you haven't already looked it up on google maps, Burundi is in central-east Africa neighboring Rwanda, Congo and Tanzania. Here's the proverbial 1000 words:
There are several regional trade blocs in Africa, one of which is the East African Community (EAC) consisting of Rwanda, Burundi, Kenya, Tanzania and Uganda. Currently the community allows for the free movement of goods and workers between member states. Longer term they are planning on a central stock exchange and currency, although I wouldn't be surprised if recent events in Europe are causing second thoughts.
Another factor that is probably hindering implementation is rampant inflation in all of the countries save Rwanda. Here are some numbers
from AllAfrica.com (article dated 11/27/2011):
East Africa's biggest economy Kenya October inflation accelerated to 18.9%, in Uganda the rate is at 30.5% the highest for the last 18 years and in Tanzania inflation surged to 17.9% and Burundi at 13%.
Here's a look at how the 5 currencies have performed vs the US Dollar over the past year:
The Kenyan Shilling, the Ugandan Shilling and the Tanzanian Shilling had all weakened considerably up until the middle of Oct but have seen a dramatic recovery since then. The Burundian Franc had remained in a fairly narrow band all year up until Tuesday when the currency underwent a steep devaluation of 5%. That kind of behavior screams peg but I couldn't find an explicit mention of one anywhere on the interwebs. Here's a closer look with a chart of the USD/Burundian Franc cross over the past 5 weeks:
Now we move on to the second question of relevance. I personally feel that dramatic moves in the forex markets, anywhere in the world, are worth paying attention to because they are symptomatic of the ongoing currency wars. Practically every country has a plan of 'exporting' their way to economic prosperity and rather than focusing on efficiency or quality, which takes time and effort, they take the easy route of cheapening their products through currency devaluation. This may work for 1 year, 5 years, 10 years, or even 20 or more years (a la Japan or China), but there may come a time when the market swings violently the other way and then there's very little that can be done (
for the latest victim see Belarus). Weakening your own currency is child's play; strengthening your own currency is a different matter entirely since a central bank can't simply print another country's currency (at least not legally) to buy back their own.
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