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Insight & Analysis - January 19, 2022

How Tunisia Ensures its Currency, the Dinar, is Africa’s Strongest

Despite the economic challenges, Tunisia, through strategic policies has been able to maintain the value of its currency above the global benchmark, the dollar.

Tunisia is home to Africa’s strongest currency, the dinar. With a current value of 1 dinar to 3.31 dollars (that is NGN1,359.40), the northernmost country on the continent is making quite the name for itself. Considering the economic struggle across Africa where 40% of the population live below a dollar, raises the question, how did is Tunisia able to achieve this?

A Brief Look at Tunisia’s Economy

With a GDP of 39.24 billion USD as of 2020,  Tunisia’s economic growth has hinged on oil, phosphates, agri-food products, car parts manufacturing, and tourism. The outbreak of the COVID-19 resulted in a severe drop in the country’s economic growth compared to most of its regional counterparts,  having entered this crisis with slow growth and rising debt levels. 

The World Bank states that Tunisia’s GDP growth contracted by 8.8% in 2020. Unemployment grew from 15% preceding the pandemic to 17.8% by the end of the first quarter of 2021. It continues to impact 24.9% of women and 40.8% of young people aged 15–24. Despite all the challenges, Tunisia, through strategic policies has been able to maintain the value of its currency above the global benchmark, the dollar. 

How Tunisia Ensures the Value of its Currency. 

The Republic of Tunisia has adopted a fixed currency exchange policy. This cushions all market factors that could cause uncertainty in the value of the dinar, ensuring stability for import and export businesses, as well as individuals across the country. The fixed exchange rate policy is the opposite of a flexible exchange rate system obtainable in countries like Nigeria, which allows for the exchange rate to be determined by demand and supply.

What Is a Fixed Exchange Rate?

A fixed exchange rate is a government or central bank policy that binds a country’s official currency exchange rate to the exchange rate of another country’s currency or the price of gold. The goal of a  fixed exchange rate policy is to keep the value of a currency within a specific range. 

A fixed exchange rate comes with the advantage of avoiding currency fluctuations, encouraging companies to invest, keeping inflation low and avoiding devaluation. On the downside, it can conflict with other macro-objectives, cause current account imbalance, may require higher interest rates and is less flexible. All in all, it is a policy that should be considered strongly by nations struggling with currency devaluation. 

READ ALSO: 5 Strongest Currencies in Africa Against the Dollars in 2021

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