# 1. INTRODUCTION

Following the economic crisis that impacted Sub-Saharan Africa (SSA) from the second half of the 1970s, the unification of exchange rates (official and parallel)' and integration of parallel markets into the official economy, has been a major policy objective for reforming African countries. The extent of macroeconomic imbalances (especially fiscal) that have prevailed in SSA and the rudimentary nature of economic institutions (such as the banking system), provide a strong case for a gdualistic approach for exchange rate unification in SSA. In this context, centralised multi-unit auctions for foreign exchange were introduced from the early 1980s in SSA as a transitonal medium towards a credible and sustainable unified regime (such as. an efficient, decentralised interbank market). A brief overview of the structre of foreign exchange markets in SSA (including auctions) is contained in sub-section 1. 1 below. Further, sub-sction 1.2 provides a discussion on the objecdves and rationale for the choice of foreign auction markets as an initial component of the exchange rate unification reform in SSA.

The objective of this paper is to conduct a basic analysis of auction data to explain the different outcomes regarding the auction objectives (e.g. exchange rate unification) that have been observed in SSA This paper studies. foreign exchange auctions in four African counties: Ghana, Nigeria, Uganda and Zambia. The auctions' periods covered by the study are: 19 Sep. 1986 to 5 March _l992_ for Ghana, 26 Sep. 1986 to 24 Nov. 1988 for Nigeria, 31 Jan. 1992 to 7 May I993 for Uganda, and 11 Oct 1985 to 24 Jan. 1987 for Zambia. While auctions in Ghana and Uganda are generally considered to have been fairly sucessf those of Nigeria and Zambia proved unsustinable or produced considerable exchange rate volatility. We hope that the typology of auctions developed in this paper will help to inform the imroved design and conduct of auctions at the micro-leveL A further objective of this paper is to provide the background for a more rigorous analysis in a companion paper (Aron and Elbadawi, 1994), which models the micro-es of the auction rates for the above four countries, and tst some policy propositions motivated by aucton theory.

1.1 Multiple Foreign Exchange and Auction Markets in Sub-Saharan Africa For most SSA countries, exchange rate policy was static from Independence until the 1980s, playing no role in balance of paymen adjustments. The fixed exchange rate regimes of the 196Ds and early 1970s appeared to be viable, given consistent macroeconomic policy and a relatively favorable exal environment By the second half of the 1970s, however, hese economies had been weakened by public expenditure. booms (exhibiting ratcet effects) following the positive shocks in ol and commodities markets. Adverse and persistent-terms of trade (TOT) shocks from the mid-1970s fiurher drained foreign exchange reserves in many SSA countries, bringing their exchange rate regimes under pressure. In most cases, the overvalued exdhange rates were defended by the rationing of foreign

mThe term unificafion in the SSA context refers to eradicaon of the parall nrket. However, since these counries ac likely to maintain capital contols in the mdimn term, there would remain a small role for the parl _market_ in meeting portfolio demand- Our concept of unification in **SSA** is thus a substantial reduction of the panre markct so that it is no longer a major signal in the economy.