In the spring of 1997, Thailand spent billions in defending its currency (the Thai Baht) against speculative attacks, finally capitulating and devaluing the Baht in July 1997. This triggered moves throughout the region to defend currencies against speculators.
Ultimately, these efforts were not successful and many countries abandoned the effort and allowed their currencies to float freely.
The Philippines, Indonesia, and South Korea abandoned their pegs against the US dollar.
The currency crisis resulted in each of these four countries having negative GDP growth in 1998, as follows:
- Thailand (-7.63%)
- Philippines (-0.58%)
- Indonesia (-13.13%)
- South Korea (-5.47%)
By the following year (1999), all of these countries experienced positive GDP growth, and in the 10 years that followed (2000 to 2009) average GDP growth rates were as follows:
- Thailand (4.32%)
- Philippines (4.46%)
- Indonesia (5.11%)
- South Korea (4.68%)
Granted, the average GDP growth rates before 1997 (1987 to 1996) for these countries, excluding The Philippines, were slightly higher than the growth rates in the 2000’s. However, this could simply be because these countries have gradually moved up the ladder in terms of development – As a country becomes more developed, they start to have less room for growth.
For example, Germany (a developed economy) had an average GDP growth rate of 1.67% between 1987 and 2009, whereas Nigeria and China (both developing economies) averaged 4.88% and 10.02%, respectively, during the same period, with Nigeria having two dictators and at least one military coup d’état during that period.
Closer to home, Egypt devalued its currency and allowed a free float in 2016, and has mostly seen positive results from this action, including:
- having a stable currency
- preserving its foreign reserves and deployment of its cash toward developing its economy
- higher GDP growth in each of the two years that followed the devaluation than in the five years (average) before the devaluation.
Will allowing the Naira float / exchange rates determined by market participants really harm the Nigerian economy as many have been made to believe?
As i said in this article, the best time for the Buhari administration to devalue the Naira was during the 2015 oil crash and the recession that followed. The next best time is NOW.
Don’t let a good crisis go to waste (for the second time in a row)!