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Currency Debasement: Cameroon is at Risk of another Economic Downturn 

By Linus Nyiwul

CameroonPostline.com — Many sectors of the Cameroon economy today still bear the scars of the commodity price declines of the late 1970s and early 1980s, precipitating a prolonged economic crisis. This fall in international commodity prices at that time has been attributed to the recession that hit Western countries, particularly the United States in the early 1980s, preceding the oil shock. However, one important factor often overlooked is the effect of currency debasement.

Currency debasement is usually an attempt to gain an export advantage over one’s trading partners. But it generally benefits hard assets and countries endowed with such assets. Cameroon benefited from the resulting higher cocoa and coffee prices. This increase in commodity prices in the 1970s was partly as result of United States reneging on its Bretton Woods commitments; delinking the dollar from gold and, consequently, effectively devaluing the dollar against the hard metal.

This led to a fall in the value of the currency and a rise in prices across the board. To combat the resulting high inflation the U.S Federal Reserve sharply raised interest rates to cool the overheating economy. This precipitated a bear market in commodities in general, whose effects were devastating for Cameroon due to the heavy reliance on commodity exports.

The resulting low cocoa and coffee prices could no longer justify investments in this sector, and the result was deterioration in the productive capacity of the primary sector. The socio-economic impact still lingers in the minds of older Cameroonian producers of primary commodities. The more things change the more they stay the same, so goes the saying. Here we are in 2012, facing a similar problem. But it may be even more potent this time. All world central banks are simultaneously debasing their currencies.

The U.S. Federal Reserve is holding rates close to zero for an extended period of time and has also resorted to buying up federal government debt. The European Central Bank is forced to bailout bankrupt European states and their banks. All these actions are given various names but they all amount to money printing. Printing units of a currency into existence dilutes the currency already in circulation. This not only punishes savers, it also increases the cost of living.

The poor are further forced to the margins of society. Cameroon’s currency, the FCFA is pegged to the Euro which has already depreciated substantially against other major currencies in the past year. This depreciation translates into a loss in value for the FCFA against all other currencies. It would be even more devastating for Cameroon (and the entire FCFA region) if the rumours of a potential FCFA devaluation ever materialise.

You might ask: what is so wrong with making Cameroon’s exports cheaper? Commodity prices are reacting to this phenomenon by rising; even faster than incomes. Of course, Cameroon’s primary sector, as in the 1970s will benefit from this rising commodity prices. However, such commodity price inflation is not sustainable. It would be unforgiving to ignore the lessons of the past or to assume the economic cycle in which we are at the moment is any different from that of the 1970s.

Eventually, the commodity sector will run into a bubble (if it is not already in one now), whose burst will leave a great deal of damage in its wake. Cameroon can avoid this fate by building a self-sustaining domestic economy. But time is not on our side. There is no hope this is possible. In the meantime, economic operators can become proactive.

Primary goods producers can anticipate and develop plans to hedge and mitigate the resulting negative effects. Also, high net worth individuals can prosper by finding ways to preserve the value of their assets through diversification. A vast majority of Cameroonians will bear the brunt of the destabilizing effects of the current world economic conditions because they cannot afford to hedge their living standards the way high net worth individuals would do.

This portion of the Cameroon society will ultimately end up looking to the government to improve their plight. Unfortunately, the government’s plight is indirectly tied to Europe’s fate. The chance that the Euro collapses is not negligible because the economic foundations of the Euro zone have clearly faltered. What is Cameroon’s plan B if the Euro collapses?

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