July 03 ,2014 | by Sarah Parkin

20 years of Brazilian Real – why do countries launch new currencies?

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Brazil introduced the real two decades ago as part of a bid to beat inflation. But, why do countries launch new currencies?

On 1 July, Brazil celebrated the 20th anniversary of introducing a new currency. The real made a massive difference to the nation’s economy, and it is not surprising that many Brazilians look back negatively on the time before the currency was in use.

But why do countries introduce new currencies, and does it make a difference?

Fighting inflation

For Brazil, the real was a last-ditch solution to very serious problems with hyperinflation. Prices were spiralling throughout the late 1980s and early 1990s, and the BBC reports that many families would rush out to do huge grocery shops as soon as they got paid to make sure they bought goods while they could afford them. Cars would crowd petrol stations to buy fuel before the cost rose again.

With inflation rising at an unstoppable rate – over 2000 per cent per year in 1993 – the government of the time took more and more drastic measures to try and stem the tide. In 1991, every bank account with a balance of more than US $1,000 was frozen.

Over the ten year-period leading up to 1994, the nation’s currency had been changed five times, in the hope that revaluing Brazilian money would stabilise the situation. But changing economic policies and an unstable economy rendered that impossible. When the real was introduced, it stayed in place and by 1996 inflation was in single figures.

Angola, Belarus, Bolivia and Madagascar are among the countries that have also sought to stave off spiralling inflation through issuing a new currency.

 

Ensuring stability

More recently Turkmenistan has applied the same tactics to manage problems of its own. In 2008-09 it undertook reform of the manat, though it chose to keep the same name for the new currency so it could reinforce a sense of continuity with the old monetary system.

In a report for the International Monetary Fund’s Finance and Development publication, Åke Lönnberg explained that the central Asian nation had faced a shortage of current exchange, meaning that there had actually been an official exchange rate that valued the currency much more positively than the commercial rate being used for trading.

While the government had pegged the official rate at 5,200 manat per US dollar, it was actually being bought and sold within Turkmenistan at around 23,000 per dollar. That meant the pricing system had become complicated and inefficient and this was causing problems for everything from accounting to statistical reporting. When Turkmenistan revalued the manat, it sought to unify the rates to ensure a more stable financial system.

 

Currency union

Sometimes the decision to adopt a new currency is a conscious one, rather than a response to current events. When the European Union first proposed a single currency, it was at least partially an ideological decision as part of the move towards closer economic integration within the bloc. However, it also comes with numerous benefits in a common market, saving huge amounts of time and resources that are otherwise devoted to currency conversion when capital moves across borders.

In both respects, the example of the EU may well provide the framework for another nearby union. As Russia is supposedly moving towards establishing a Eurasian Economic Union with Belarus and Kazakhstan, it is unsurprising that reports have suggested a currency union could be intended down the line.

Sarah Parkin

Sarah Parkin used to work as News Writer for LSBF.  Sarah is specialised in finance, technology and business news.

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