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Depreciation of the Dalasi

Feb 5, 2014, 11:07 AM

The Monetary Policy Committee of the Central Bank of The Gambia has projected real GDP growth at 7.5 percent in 2014 predicated on robust expansion of agriculture and services particularly tourism.

This however comes as the dalasi significantly depreciates against major international currencies.

In the quarterly Monetary Policy Committee report released to the press on Friday, the CBG Governor Amadou Colley said although the dalasi was broadly stable in the first half of 2013, it has depreciated significantly in the second half of the year.

‘‘As at end-December 2013, the Dalasi depreciated against the US Dollar by 14.8 percent, Euro (21.0 percent) and Pound Sterling (14.7 percent) from December 2012,’’ he said, adding that in nominal effective exchange rate terms, the Dalasi depreciated by 15.1 percent compared to 13.5 percent and 7.3 percent in 2012 and 2011 respectively.

Over the past few weeks, the exchange rate for the Gambian dalasi has been such that our money was losing value.

Indeed, real purchasing power has been severely affected, as the dalasi struggles against major international currencies such as US dollar, British pound and the CFA franc.

This is a clear indication of the depreciation of the dalasi against these major currencies.

Economists say that a currency depreciates when that currency is worth less compared to another nation’s currency, just like what is currently happening to the dalasi.

In a floating exchange rate system such as we have in The Gambia, the national currency is bound to rise and fall in value.

Actually this does happen from time to time, and it is essential for people to know that there are many factors responsible for such a development.

Among the factors responsible could be the supply and demand for the local currency against the major international currencies.

This is one key determinant of the way that currencies appreciate and depreciate against each other.

Currency values usually depend on market forces, such as supply and demand in the market, as well as other economic factors, and even on political actions and omissions.

In addition, the comparative rates of interest and inflation, as well as the cost of money in a country make up a large part of how a currency is valued in relation to other currencies.

Some governments and central banks do intervene in the currency markets to stabilize or manipulate the value of their currencies.

From these, we can also see that bad government economic policies do also play a role in situations like this.

Thus we need to tread carefully in handling the current crisis in the foreign exchange market.

In a situation where the central bank is supposed to be independent in determining monetary policy and so on, any heavy-handed government interference in the operations of the market could have unintended negative consequences.

We understand from an economist that inflation is one of the main factors in currency depreciation. This is because when inflation occurs, the general prices of goods and services would be on an increasing trend.

The uncertainty about developments in food and energy prices sometimes further increase inflationary expectations.

In any case, the reality is that the increase in food prices coupled with the strong growth in the monetary aggregates, the recent sharp depreciation of the dalasi is expected to exert further pressure on domestic prices.

To address the situation, the strengthening of the Dalasi would require great efforts at the domestic level.

The expected good harvest this year could be one way out.

‘‘The love of economy is the root of all virtue.’’

George Bernard Shaw