Impacts of devaluation on Senegalese households: policy implications

Abstract

In January 1994 the franc CFA was devaluated from 50 to 100 FCFA to the French franc. This article uses detailed income and expenditure data to simulate the impact of the devaluation on real household income and identify the groups in Senegal that are most damaged. Urban households are hit hardest because they consume large quantities of imported rice and do not earn income from exportables. Surprisingly, one rural area is as negatively affected as the urban areas, one experiences no change, and a third realizes only a small (5%) increase in real income. These small or negative affects occur because consumption of imported rice is high — which is still the case a year after devaluation — and income from the production of exportable peanuts is low. Relatively strong positive impacts (14–16% increase in real income) were realized only in the two zones where peanuts account for a large share of total income (about 50%). This is perhaps a more negative (or, in some cases, ambiguous) impact in rural areas than we think policymakers expected. The difference from expectations is due to the higher-than-expected levels of rice consumption and the lower-than-expected shares of income earned from peanut production. These two facts together lead to a greater negative demand-side effect and smaller positive supply-side effects of devaluation in several rural zones. Attention should be given to 1. Policies to protect vulnerable groups and 2. Policies to stimulate investment by groups realizing short-run increases in income (thereby channeling the short-run benefits into actions that will foster long-run economic growth).