Question

WHAT IS A CURRENCY PEG? HOW DOES IT AFFECT AFRICA AS A REGION?

Answer 1

Currency pegging is basically defined as pegging or attaching currency rates of the exchange bank of one country to the currency rate of the other country. In other words it is also called as Fixed Exchange rate system and it stabilizes the currency rates between the two countries.

There are two sides of the same coin. Similarly there are both advantages as well as disadvantages of pegging the currency.

Advantages can be:

• It helps to promote exports within different countries.
• Foreign investment is more in the country.
• There are low inflation rates due to pegging of currency.
• There are stabilized currency rates or exchange rates between the countries.

Disadvantages can be:

• The prices of the currency are kept low because of which there is not much competitive environment as compared to floating exchange rate system.
• Constant efforts have to be done in order to maintain the balances between the currencies.

In Africa, the currency is used by 14 different countries. The currency is pegged at a fixed exchange rate and they have to deposit 50% of their foreign exchange reserves with the French Treasury.

Currency pegging can affect Africa because their currency prices compared locally are comparatively low because of which their currency would be pegged at lower rates.

Thus currency pegging can have both benefits as well as drawbacks.