Birr Insights

From Peg to Float: What Changes When a Currency Becomes Flexible? source: sora Many African countries have moved away from rigid “peg” systems toward managed floating exchange rates. In a fixed (fiat-based) system, a currency’s value is locked to another (like the US dollar), and the central bank must defend that peg with foreign reserves. Under a managed float, the currency’s price is largely set by market supply and demand, though the central bank may still intervene to smooth volatility. Nations such as Ghana and Kenya now use managed floats (Uganda’s shilling floats freely) This shift brings big economic changes. A flexible currency can correct trade imbalances but often depreciates at first, leading to inflation and higher import costs. In Ghana, for example, the cedi plunged over 50% in 2022 , driving inflation above 40% by late 2022 In contrast, Uganda’s shilling has remained relatively stable (about 4% inflation in 2024) as its market exchange rate rebounded recently...