ERN - Eritrean Nakfa

Overview of the Eritrean Nakfa (ERN)

The Eritrean Nakfa (ERN) was officially issued for the first time on November 15, 1997, in Eritrea and replaced the Ethiopian birr. The name Nakfa is derived from the town of Nakfa in Eritrea, where the first major victory in the struggle for independence in Eritrea took place. One Nakfa is divided into 100 cents. However, coins are rarely used in daily transactions due to their low value. The current denominations of banknotes are 1, 5, 10, 20, 50, and 100 nakfa.

The Eritrean Nakfa is managed and issued by the Bank of Eritrea. The bank establishes monetary policy and regulates the money supply in circulation to stabilize the economy. The Eritrean banking system is also affected by strict control policies and restrictions on people's access to banking and financial services.

The economic and political situation in Eritrea greatly affects the value of the nakfa, leading to volatility and difficulties in international transactions.

History of the Eritrean Nakfa (ERN)

The Eritrean Nakfa has a rather rich history. This currency was officially put into circulation in Eritrea on November 15, 1997, and replaced the Ethiopian birr at par.

The Nakfa is pegged to the US dollar with a fixed exchange rate of 1 US dollar = 15 ERN. Previously, the official peg of the Eritrean Nakfa was set at 1 US dollar = 13.5 ERN. This currency is not fully convertible, which is why the black market exchange rate is often 15 nakfa for 1 dollar.

From November 18 to December 31, 2015, the Eritrean Bank replaced all nakfa banknotes to combat counterfeiting and illegal trade, primarily the Sudanese human trafficking. As a result, a large amount of Eritrean Nakfa is stored in massive reserves outside of Eritrea.

The currency replacement was highly confidential and designed to prevent traffickers from timely exchanging the old currency for the new one. On January 1, 2016, the old nafa banknotes were no longer considered legal tender, and the foreign currency reserves became worthless.

The current banknotes were designed by African American Clarence Holbert and printed by the German printing company Giesecke & Devrient.

The Eritrean Nakfa (ERN) Denominations

The denominations of the Eritrean Nakfa currently in circulation, both in banknotes and coins, include:

• Banknotes: 1, 5, 10, 20, 50, 100 Nakfa Eritrean Nakfa

• Coins: 1, 5, 10, 25, 50, 100 Cent Eritrea

Exchange rate of the Eritrean Nakfa (ERN)

The Central Bank of Eritrea applies a regulated floating exchange rate policy to the Eritrean Nakfa, although the Eritrean government prefers to pursue a fixed exchange rate policy. However, with many periodic devaluations implemented, the ERN is very weak and its real exchange rate is 100 ERN = 1 US dollar. The demand for purchasing ERN currency from outside is not high. Therefore, a regulated floating policy will help maintain a better exchange rate for the Nakfa, stabilize it, and control inflation more effectively.

History of the Eritrean Nakfa exchange rate

The Eritrean nakfa has gone through many significant phases since its issuance:

• Early stage (1997): Nakfa replaced the Ethiopian birr with a fixed exchange rate to build trust.

• In 2005, it transitioned to a managed float regime, allowing the Central Bank of Eritrea to adjust the exchange rate based on supply and demand to maintain stability.

• Currently, the value of the Eritrean nakfa is influenced by various economic and political factors, leading to continuous fluctuations. Monetary control policies as well as restrictions on international transactions somewhat create significant challenges for this currency.

• Future prospects: Eritrea is facing many economic difficulties, and the government is adjusting policies according to market needs to timely respond to these challenges, aiming to ensure economic stability and improve the balance of payments.

Factors Influencing the Nakfa Exchange Rate

Several macroeconomic factors play a critical role in shaping the exchange rate of the Nakfa, Eritrea's national currency. Among these, inflation rates have significant implications; higher inflation diminishes purchasing power and can lead to a depreciation of the Nakfa relative to stronger currencies. Additionally, the balance of payments, encompassing trade deficits and surpluses, directly impacts foreign currency reserves and, consequently, the Nakfas value. For instance, a persistent trade deficit could signal a frail economy, prompting investors to move away from the Nakfa, thereby exerting downward pressure on its exchange rate. Furthermore, external debt levels contribute to the currency's valuation; elevated debt may increase the perceived risk associated with holding the Nakfa, leading to capital flight and currency depreciation. Ultimately, understanding these interconnected macroeconomic dynamics is crucial for evaluating the factors that influence the Nakfas exchange rate in the broader context of Eritrea's economic landscape.

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