ABSTRACT
The study examined exchange rate volatility and economic growth in oil producing countries in Sub-Saharan African with a view to ascertaining if exchange rate volatility of oil producing countries in Sub-Saharan African impact on economic growth, again to examine the response of economic growth in oil producing countries in Sub-Saharan African to a shock in exchange rate and other monetary instruments and to identify if institutional factors and exchange rate volatility have any positive impact on economic growth of oil producing countries in Sub-Saharan Africa. The study utilized annual time series data drawn from five (5) oil producing countries in Sub-Saharan African spanning from a period of 39 years from (1981 to 2019). The pooled fixed effect (FE) model was adopted for objective 1, the GARCH model was used to measure exchange rate volatility in the models the empirical findings revealed that exchange rate volatility and money supply (MS) are positive but shows no significant impact on economic growth for oil producing countries in Sub-Saharan African. Whereas, foreign direct investment, and trade openness have a negative significant impact on economic growth, credit to private sector and capital have a positive significant impact on economic growth for the periods under review. Panel structural vector autoregressive (PSVAR) model was employed for objective 2 the empirical findings showed that period there is a significant impact between the responses of economic growth to a shock in exchange rate so as other monetary response policy variables as money supply, interest rate and inflation. However, the impulse response function results showed that the response of growth to exchange rate is negative, this also applies to money supply and interest rate only inflation proxy by consumer price index has a positive response to a sudden shock in exchange rate for all selected oil producing countries in Sub Saharan African. Panel fixed effect model and the two stage least square model for objective 3 findings revealed that exchange rate volatility has a negative but has a significant impact on growth in the same line institutional factors as political stability and government effectiveness are both positive and has a significant impact on economic growth. Going forward the interaction of exchange on control of corruption, political stability and government effectiveness were positive and shows a significant impact to economic growth for selected oil producing countries in Sub Saharan African. The study therefore recommends among others that policy makers within the selected countries should ensure policy consistency that could improve stability of exchange rate, investment outcomes, increased productive capacity, again, maintain political stability as this sends positive signals to investors and help to create more investment friendly climate and hence allow for foreign investment stabilized exchange rate regime and growth in the economy.
TABLE OF CONTENTS
Title page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table of Contents vi
List of Tables viii
List of Figures ix
Abstract x
CHAPTER
ONE: INTRODUCTION 1
1.1 Background to
the Study 1
1.2 Statement of
the Problem 10
1.3 Research
Questions 17
1.4. Objectives of
the Study 17
1.5 Statement of
Hypotheses 18
1.6 Significance
of the Study 18
1.7 Scope and
Limitations of the Study 20
CHAPTER
2: REVIEW OF RELATED LITERATURE 21
2.1 Conceptual Literature 21
2.1.1 The concept
of economic growth 21
2.1.2 Concept of
exchange rate volatility 22
2.1.3 Exchange
system and monetary standards 25
2.1.4 Measuring of
exchange rate volatility in Sub-Sahara Africa 26
2.1.5 An overview
of effect of exchange rate management on trade in SSA 25
2.2 Theoretical Literature 27
2.2.1 The
Marshall-Lerner condition 28
2.2.2 The
purchasing power parity theory 28
2.2.3 The
traditional flow model 31
2.2.4 The
elasticity approach 32
2.2.5 The monetary
approach 32
2.2.6 The
portfolio approach 34
2.2.7 The
neoclassical growth theory 35
2.2.8 Mundell fleming theory 37
2.3 Empirical
Literature 38
2.3.1 Related
global empirical literature with respect to exchange rate volatility on
economic growth 38
2.3.2 Oil producing
Sub-Sahara Africa and Its member country specific studies to
exchange rate volatility and economic
growth 53
2.3.3 Summary of
literature review 65
2.3.3.1 Summary of
literature review on global studies 65
2.4 Gap in empirical literature 77
CHAPTER
3: METHODOLOGY 79
3.1 Theoretical
Framework 79
3.2 Research
Design 79
3.3 Model
Specifications 80
3.3.1 Modelling
objective one 80
3.3.2 Modelling
objective two 82
3.3.3 Modelling objective
three 84
3.4 Pre estimation Test 87
3.4.1 Descriptive
statistics 87
3.4.2 Panel units
root tests 87
3.5 Post Estimation Test 88
3.5.1
Autocorrelation test 88
3.5.2
Heteroscedasticity test 88
3.6 Data Sources 88
CHAPTER
4: PRESENTATION OF RESULTS 90
4.1 Presentation
of the Descriptive Statistics Results 90
4.1.1 Panel unit
root test in model 1 91
4.2 Presentation
of Regression Model Results For Objective One 92
4.3 Presentation
of the Model Results For Objective II 99
4.3.1 Impulse
response functions (IRFs) 99
4.3.2 Panel SVAR Forecast Error Variance Decomposition (SFEVD) 102
4.4 Presentation
of the Model Results For Objective III 103
4.4.2 Panel pooled
OLS results 105
4.5 Two Stage
Least Square Panel Results 114
4.6 Evaluation of
Working Hypothesis 116
CHAPTER
5: SUMMARY, POLICY RECOMMENDATION AND
CONCLUSION 119
5.1 Summary of
Findings 119
5.2 Policy
Recommendation 121
5.3 Economic
Implication 122
5.4 Conclusion 123
5.5 Contribution
to Knowledge 125
References 126
Appendix 134
LIST OF TABLES
1: Exchange Rate Regime in Selected Oil
Producing Countries in SSA 8
2: Average Yearly Real Exchange Rate amongst
Selected Countries in
Sub-Saharan African from 1980 to 2020 9
2.1 Summary of Literature Review on Global
Studies 67
2.2: Summary of Literature Review on Oil
Producing SSA Studies 63
4.1 Descriptive Statistics 90
4.1B Correlation Matrix 91
4.1.1: Panel Unit Root Test 92
4.2.1 Pooled OLS result 93
4.2.2 Summary results of the pooled fixed
effect model for objective 1 94
4.2.3 Summary results of the pooled random
effect model for objective1 95
4.2.4 Summary results of the Hausman model
selection test 96
4.2.4 Summary results of the pooled random and
pooled fixed effect models 97
4.3. Result of
Structural VAR Estimates Result on Long- run pattern 99
4.3.1 Response of
exchange volatility to Cholesky 1 SD. 100
4.3.2 Structural
variance decomposition to GDP 102
4.4. 1:
Descriptive Statistics 105
4.4.2.1:
Institutional quality, exchange rate and economic growth 105
4.4.2.2 Summary results of the pooled fixed
effect model for objective III 108
4.4.2.3 Summary results of the pooled random
effect model for objective III 109
4.4.2.4 Summary results of the Hausman model
selection test 110
4.4.2.5 Summary results of the pooled random and
pooled fixed effect models 111
4.5.1: Institutional quality and economic
growth (2SLS Results) 114
LIST OF FIGURES
1: Exchange rate
movement in Sub-Saharan African countries 12
2: Current trade
balance of selected oil producing countries in SSA 13
3: Gross Domestic
Product Growth rate of selected Oil Producing in SSA 16
4.3.1 Impulse
Response Function to Exchange rate Volatility 101
CHAPTER
1
INTRODUCTION
1.1 BACKGROUND TO THE
STUDY
In
recent literature, one of the most discussed topic in the field of macroeconomics
rallies around economic growth. Thus, the proponents of growth theories and
variation have been critically studied over 20 decades ago. Notwithstanding,
new growth theories that constitutes economic growth and macroeconomic
conditions are constantly been researched on. An example is the study of
exchange rate volatility and economic growth which have gained greater grounds
in economic discuss in recent times. The discuss on exchange rate volatility
has aroused the need for the adoption of a common currency especially among
blocks as in the European Union, West African and other Regional Blocks, which
is viewed to be beneficial to their economy and facilitate economic growth
within such countries. Exchange
rate volatility can be described as a sharp swing or fluctuation in exchange
rate over a period of time (Olusola & Opeyemi, 2013; Bala & Asemota, 2013).
The magnitude of such changes in exchange rate be it positive or negative, is
usually large and significant and can alter the normal functioning of the
economy through macroeconomic variables such as interest rate, inflation rate,
etc. In view of this, exchange rate volatility
is a vital and essential element to the economies of developing countries
especially countries that depends fully on international trade, the position of
exchange rate volatility represent risk and uncertainty which comes from
imposed cost on risk (Sara, 2019). Christian(2015), is of the opinion that
exchange rate has the tendency of hindering trade which in turn may affect the
growth of such an economy.
In
contemporary times the discuss on exchange rate volatility were not common
among scholars in academics and in political era until the collapse of the
Bretton Woods system in 1971 where optimal exchange regime moved from pegged
exchange rate system to a free floating exchange rate regime even at the
expense of some country`s currency. Today, countries around the globe can adopt
various exchange rate regimes as policy instrument in the quest to maintain
economic growth and stability in the economy, depending on the peculiarity of
the economy. Most of the countries try the much they can to prevent exchange
rate parity from distorting their economic goals. However, in the place of
maintaining trade balances there have been evidence of dynamics or fluctuation
in the currencies of various countries against those of other nationalities which
may lead to either an appreciation or depreciation in currency valuation. This
unsteady movement in currency attract risk and uncertainty in exchange rate and
creates turmoil in international trade; and has the ability of affecting growth
and competitiveness in the international market.
Since
price movements have existed, the 1970s saw a significant shift in the global
financial framework from a system of pegged trade rates that had prevailed for
roughly a quarter of a century since the Bretton Woods meeting to a system of
adjustable but regulated rates (Domnbusch, 1980). Trade paces of various
countries have generally been shifting since that transition from a pegged
conversion scale framework to an adaptable exchange rate framework, which has
led to significant instability in return rates among winning nations. Since
introducing monetary advancement modifications and auxiliary modification
programmes during the 1980s and 1990s, trade rates have been highly
unpredictable in most Sub-Saharan African countries. Throughout the 1980s and
1990s, they adjusted their systems for universal exchange and foreign exchange
rates (Maehle, Teferra, & Khachatryan, 2013). Many of them had standard
conversion systems before the development that were characterized by strict
regulatory control approaches up to this point. In
an open economy, outside conversion standard strategies are among the most
significant large scale financial markers, when viewed from the perspective of
how it influences the business world's venture choice (Genc & Artar, 2014). In
creating nations, particularly sub-Saharan African nations' conversion standard
instability has been ascribed to changes in full scale financial factors, for
example, joblessness rate, expansion rate, value, loan fee, equalization of
installment and so on, which turned out to be progressively unstable during the
1980s and mid 1990s because of the Structural Adjustment Program (SAP) of International
Monetary Fund (IMF) embarked upon individuals by most of these nations (Adubi & Okunmadewa, 2009).
In
theoretical sense, the direction at which exchange rate moves has the tendency
of affecting the economy through various channels (Bernal, 2015). One
has to do with the related prices of goods that are tradeable and non-tradeable
and has the ability of affecting imports and exports. Again, temporary
variation of interest rate scale may influence economic variables such as
production, investment and consumption. The overall exchange rate is expected
to have an instant impact on economic such that a rise in uncertainty will
bring about proportional future outcomes in the present through economic
decision. Thus the mechanism of exchange rate volatility in relation to
economic growth is usually studied on individual scale, though both can affect
or neutralize each other.
It’s crucial
to note that there is consensus regarding the way exchange rate volatility is
measured as observed from existing empirical studies (Serven, 2012).
Serven opines that the computation of real exchange rate volatility depends on
observed fluctuations of prices and nominal exchange rate. Whereas, (Vieira & Bottecchia, 2013), made
a contrast that nominal exchange rate is most preferred because the valuation
of the real exchange rate incorporates with other price fluctuations which is
seen as a type of uncertainty especially for individual agents. Other studies
also opine that the use of either real or nominal exchange rate does not
significantly affect price nor obtain results. However, it has been observed
that both nominal and real exchange rates are highly correlated in fashion
especially in the presence of a free floating exchange rate system.
Nonetheless,
it is of great importance we relate the parity of exchange rate volatility to
our study specifics of Sub- Saharan African and important oil exporting countries
as the aforementioned exchange rate volatility has a deep rooted sense in trade
policy especially when it comes to import and export of both traded and
non-traded goods. Though the exchange rate
strategy of most nations is said to be pegged to the U.S. dollars which is a
fixed conversion standard framework, this is so because the U.S. dollar is an
internationally recognized currency for foreign trade, loans and debt service transactions.
By 1980, the portion of non-fuel fares had diminished from 18 percent in 1970
to around 9 percent, while the development of import extended by 5.8 percent (Olayungbo, Yinusa, & Akinlo, 2011).
Because of this import subordinate propensity, combined with overvaluation of
the trade rates, the majority of the nations in the area during the 1980s
needed to move from fare advancement approach to import-substitution procedure
to take their economies back to the development way. So as to further address
the twists in the economy, the vast majority of the nations in sub-Saharan countries
embraced changed approach of trade rates after gigantic loss of world piece of
the pie. Nigeria for example in 1986 received Structural Adjustment Program
(SAP) with changed conversion standard. The South African Reserve Bank's (SARB)
adaptable conversion scale system brought about instability of the Rand in 1997
(Bah & Amusa, 2003). Also,
somewhere in the range of 1987 and 1998, the normal quarterly devaluation of the
Ghanaian cedi was 6.59%. The genuine powerful valuation for the naira likewise
during the 1980s disintegrated Nigeria's aggressiveness, and development of
exchange eased back astoundingly during those periods. By 1990, sub-Saharan
portion of world exchange had tumbled to 1.2 percent contrasted with Asian
world portion of 19.81 percent around the same time (Olayungbo, Yinusa, & Akinlo, 2011). With
the quest for exchange advancement in the 1990 s, the U.S., through the Uruguay
Round Agreement Act (1994), conceived measures to improve exchange connection
with sub-Saharan Africa. In 2000, the U.S imports from sub-Saharan locale were
oil based commodities, trailed by non-ferrous metal, attire and garments and
iron and steel. While major U.S fares to the locale were air ship and parts,
mining apparatus, wheat, general modern hardware and street vehicles. In like
manner, sub-Saharan fare of essential items to Europe improved to 44 percent, while
that of fabricated and vitality items was 22 and 34 percent individually. The
exchange advancement additionally opens path for Asian-African exchange
connection with sub-Saharan nations' all out exchange as a level of GDP
arriving at 71.75 percent in 2006. It similarly satisfied with Mauritius'
produced fares of 19.13 percent communicated as a level of GDP in 2006 (World Bank, 2006).
Sub-Saharan
Africa can be partitioned into two sub-gatherings of nations: the CFA Franc nations
and the non-CFA Franc nations (Ahmed & Park, 2004). The
CFA nations kept their monetary association with France after freedom. They
kept up a uninhibitedly convertible exchange rate opposite the French Franc at
a foreordained equality (Baxter and Stockman, 2008). Since January 1, 1999, the
CFA Franc has been pegged to the Euro, at a pace of 100 CFA franc = 0.152449
euro. The rest of the nations in Sub-Saharan Africa comprise the subsequent
sub-gathering. These nations embraced an adaptable exchange rate system. They
likewise have encountered impressive vacillations in their trade rates. There
is proof that development and swelling execution has been diverse in the CFA
nations versus the non-CFA nations. Utilizing a broad informational index from
1964-93, (Hadjimichael, Ghura, Muhleisen, Nord, & Uçer,
2005)
demonstrate that the non-CFA Franc nations perform preferred development
execution over the CFA Franc nations. Then again, the expansion rate and its
changeability will in general be a lot higher in the non-CFA nations than the
CFA zone.
The
mean yearly development rate and swelling over the CFA and non-CFA nations for
the period, 1960 to 2000 shows that significant progress has so far been made.
Without a doubt the non-CFA nations have developed, overall, twice quicker than
the CFA nations during the 1960-2000 periods. Driving in development execution
in the non-CFA nations are Botswana, Uganda, Kenya and Malawi with a
development pace of 9.1 percent, 7.8 percent and 6.0 percent separately. In the
CFA nations, Congo, Benin, and Chad recorded the most noteworthy yield
development rate with 6.0 percent, 3.1 percent, and 3.0 percent individually. In
addition, a few nations recorded negative development paces of yield during the
period considered. These nations incorporate Niger, Togo and Gabon in the CFA
zone and Burundi and Zimbabwe in the non-CFA zone. Besides, the standard
deviations demonstrate that the fluctuation of yield development has by and
large been to some degree higher over the CFA nations than the non-CFA nations.
Then again, the CFA nations outflank the non-CFA nations with a yearly normal
expansion pace of 6.7 percent against 13.1 percent for the last mentioned
period. In the CFA zone, Togo witnessed the most reduced expansion with 4.8
percent and Chad records the most elevated with 11.1 percent. The expansion
rate in the non CFA nations goes between 6.2 percent in Ethiopia to 24.0
percent in Ghana during the period somewhere in the range of 1960 and 2015 (Dada, 2017). The
expansion fluctuation is to some degree little over the CFA nations than over
the non-CFA nations. This is normal since fixed trade rates are known to compel
optional money related approach, which prompts lower expansion rate and
swelling rate inconstancy. All the more significantly, SSA nations appear to
linger behind different districts of the World as far as yield development
execution is concerned.
According
to the International Monetary Fund exchange rate regime across Sub Saharan
African are of three kinds which includes the fixed exchange rate regime, the
floating exchange rate regime and the intermediate otherwise called the pegged
float exchange rate regimes. Sub-Saharan African countries that are said to
operate fixed or pegged exchange rate regime as Nigeria, Gabon, Equatorial
Guinea and Congo among other sub-Saharan countries that produced oil could be
attributed to constituent in the approach of monetary discipline and
credibility in policy targeted by enhancing monetary concerns within her
economy. These countries operate a fixed exchange rate regime when inflation
rate is lower than other countries where floating exchange rate is operational.
In other words the practice of pegged exchange rate is best associated where
the central bank decides to improves the stability of the local currency as
against the dollars.
The
IMF (2015) reported that between 2008 through 2014 over 60% of sub-Saharan
African countries pegged their exchange rate which is compared to over 47% of
other emerging economies. However, by comparing growth performance among
sub-Saharan African especially oil producing countries studies reveals that
prior to 2000 sub-Saharan African countries that practice flexible exchange rate
enjoys a greater output in per capita growth rate than the countries with fixed
exchange rate regime with 2 percentage. Although such growth is not
differential, as regards growth pattern for other emerging economies. In
comparison note countries that operate a flexible exchange rate regime often
experience increased level of inflation as the forces of demand and supply
which becomes the main attention for all currency drift which gives room for
fiscal discipline to be weak.
The
table 1 below shows the summary of exchange rate regimes operational for
selected sub-Saharan countries from 1980 to 2020, while table 2 shows the
average real exchange rate for selected countries within the region.
Table 1: Exchange rate
regime in selected oil producing countries in Sub-Saharan African
|
Country
|
1975
|
1980
|
1985
|
1990
|
1995
|
2000
|
2005
|
2010
|
2015
|
2020
|
|
Angola
|
N/A
|
N/A
|
N/A
|
N/A
|
Interim
|
Float
|
C/P
|
C/P
|
C/P
|
C/P
|
|
Uganda
|
Fix
|
Fix
|
Float
|
Fix
|
N/A
|
C.P
|
I.F
|
I/F
|
C/P
|
C/P
|
|
Nigeria
|
Intern
|
Float
|
Float
|
Fix
|
N/A
|
M/F
|
M/F
|
M/F
|
M/F
|
M/F
|
|
Niger
|
Fix
|
Fix
|
Fix
|
Fix
|
Fix
|
C/B
|
C/B
|
C/P
|
C/P
|
C/P
|
|
Chad
|
Fix
|
Fix
|
Fix
|
Fix
|
Fix
|
C/B
|
C/B
|
C/P
|
C/P
|
C/P
|
|
Cameroon
|
Fix
|
Fix
|
Fix
|
Fix
|
Fix
|
C/B
|
C/P
|
C/P
|
C/P
|
C/P
|
|
Gabon
|
Fix
|
Fix
|
Fix
|
Fix
|
Fix
|
C/B
|
C/B
|
C/P
|
C/P
|
C/P
|
|
Equatorial Guinea
|
Fix
|
Fix
|
Fix
|
Fix
|
Fix
|
C/B
|
C/B
|
C/P
|
C/P
|
C/P
|
|
DRC
|
Fix
|
Interim
|
Fix
|
Interim
|
Fix
|
I/F
|
I.F
|
I/F
|
I/F
|
I/F
|
Where
N/A means not available, interim stands for intermediate regime between fixed
and flexible exchange rate, C/B which means currency board, C/P which means
conventional pegged, I/F means independently float and M/F stands for Managed
Float
Source,
IMF staff reports (various years)
Table 2: Average yearly
real exchange rate amongst selected countries in Sub-Saharan African from 1980
to 2020
|
Years
|
Nigeria
|
Cameron
|
Congo
|
Gabon
|
Equatorial Guinea
|
|
1980
|
288.2723
|
137.3659
|
137.3659
|
223.6762
|
|
|
1985
|
482.5734
|
136.4968
|
136.4968
|
195.8477
|
125.3795
|
|
1990
|
70.99798
|
156.2272
|
156.2272
|
215.2904
|
85.80648
|
|
1995
|
160.048
|
96.96067
|
96.96067
|
109.4717
|
68.02832
|
|
2000
|
70.14071
|
93.69777
|
93.69777
|
96.32041
|
59.32928
|
|
2005
|
86.2665
|
99.88162
|
99.88162
|
101.8501
|
89.67134
|
|
2010
|
100
|
100
|
100
|
100
|
100
|
|
2015
|
119.0546
|
93.52298
|
93.52298
|
93.64099
|
99.31839
|
|
2020
|
138.8543
|
98.654
|
96.56778
|
96.9677
|
102.8768
|
Data sourced from WDI
2021
Exchange
rate volatility in recent times has been proven to have an asymmetric effect on
macroeconomic indicators. Such that an appreciation in exchange rate will lead
to a demand in imports and reduce exports while depreciation in exchange rate
will increase the volume of export and discourage imports. This depreciation in
exchange rate will cause a shift in consumption from foreign product to locally
produced goods. Hence this leads to diversion in income from countries that
import to exporting countries through a shift in terms of trade this trends
poised by exchange rate changes impact on the economic growth of importing and
exporting countries. Which implies that a fall in exchange rate with attendant
risks will lead to increase in economic growth through export and a rise in
exchange rate will lead to a decrease in economic growth as such country trends
to consume more through imports.
Furthermore,
the resounding and un-attendants’ issues of exchange rate volatility have
elicited and robust this topic of discussion in the study of economics
world-over (Musyoki, Pokhariyal, & Pundo,
2012). Various issued based stakeholder and policy developers are faced
with the choice of adopting an exchange rate design within their economics that
can promote economic growth. With the views that exchange rate is an essential
tool for policy stabilization, economic management in developing countries such
as oil exporting countries in Sub-Saharan African (Ndung`U, 2001), various
scholars have examined the role exchange rate volatility plays on economic
growth; however, no conclusion have been reached to opine that exchange rate
volatility can either influence economic growth negatively or positively.
Hence, this study’s attention shall focus on oil exporting countries in
Sub-Saharan African (SSA).
1.2 STATEMENT OF THE
PROBLEM
Prior to the discovery and exploration of crude oil in
the sub-Saharan countries like Nigeria in the 70’s, the exchange rate was
stable and the local currency competed favourably with the rest of the foreign
currencies. During this period, the main source of foreign exchange earner for
the sub-Saharan countries was agriculture. The prices of this product were
solely determined by the exporting country based on her production and
exporting cost. However, things metamorphosed with the discovery of crude oil in
the sub-Saharan African countries, especially with the appreciation in the
prices of crude oil during the 70’s. This appreciation in crude oil price
benefited the Sub-Saharan countries on one end and harmed the economy on the
other end. Firstly, the influx of huge foreign earnings sparked ostentatious spending
both by the governments and the people of Sub-Saharan countries and ultimately
led to the gradual abandonment of the non-oil sectors that has being the driver
of the economy in the immediate past, before the discovery of crude oil.
Unlike the agricultural commodities, whose price was
determined by the producing economy, the oil price is determined by the OPEC.
More so, the late 70’s and the 80’s witnessed constant fluctuations in the
prices of crude oil. The implication of these fluctuations in crude oil price
was that foreign reserves of the concerned Sub-Saharan countries were set on
decline, leading to scarcity of foreign exchange. The changes in exchange rate
policies such as the frequent switch from floating to pegged exchange rate
system and visa-vise, as stabilization strategy, by the CBN of these nations
were occasioned by the volatility of the exchange rate which was rooted in the
fluctuations in crude oil prices that is exogenously determined.
Furthermore, scholars in their discuss of exchange rate
volatility have come to term that large volatilities are often associated with macroeconomic
variables such as exchange rate, inflation, interest rate and are brought about
by factors like political uncertainty and international pricing system, as
observed in Sub-Saharan African countries, thus these countries are exposed to high
level of macroeconomic risk.
Data Source: World
development Indicator and OPEC statistical bulletin (2021)
Figure1: Exchange rate
movement in Sub-Saharan African countries
Figure 1 Indicates that exchange rate is volatile in
Sub-Saharan African countries between the periods of 1970 to 2018 showing an
erratic flow in waves.
As
stated earlier, most oil producers Sub-Saharan African countries on a larger
scale depend on crude oil as key export commodity which price is purely
determined by the forces of demand and supply, political uncertainties in the
international scene and the decisions of the OPEC body which set a price
ceiling for its member countries. Such change in price has potentials to cause a
massive fall in future output especially when they are erratic and unpredictable.
This is supported by Al Samara (2009), who found that declining oil output is among
the key determinants of exchange rate volatility. More so, these Sub-Saharan
African countries in turn still rely on foreign countries for the importation
of refined petroleum products for local consumption as they lack functional
refinery for domestic refining. In any exception where the countries has
functional refinery, the refinery may lack the capacity to meet domestic demand,
as a result, the country will still depend on foreign countries for the surplus
demand. These often results in the infiltration of international price of crude
oil into the domestic pricing system and when import tax are added, the
pressure on price is increased, as a result more foreign exchange will be
required. All these fluctuations in
price increases uncertainty and risk in certain transaction internationally and
discourage trade because it breeds unfavourable trade balance. Furthermore, high level of exchange risk on
its own reduces the expected revenue from exports and distorts incentive to
trade thereby causing economic growth to be on the decline (Mumuni & Owusu-Afriyie, 2010).
Data Source: World
development Indicator and OPEC statistical bulletin (2021)
Figure 2: Current
trade balance of selected oil producing countries in Sub-Saharan African
Canzoneri
et al., (1984) opines that exchange
rate volatility induce undesirable macroeconomic condition such as inflation in
places where government grants subsidies for imported products that are not produced
domestically. Such economic effort in the absence proper legislation and
control on many occasions ended up as a total waste and loss. Exchange rate may
affect economic growth if the currency is effective enough in attaining to the
prospects of economic growth thus exchange rate can influence interest rate.
The movement of exchange rate is often predicted by interest rate parity
condition thus, a change in domestic interest rate can influence asset
dominated in different currencies. This change in interest rate through
exchange rate movement can alter the opportunity cost of projects and
consumption allocation affecting aggregate demand and thus distorting economic
growth through reduction in national output level.
Relatively,
exchange rate regime in Sub Saharan African (SSA) countries reside around
certain fluctuations in exchange rate that often discourages risk-averse
exporters leading to low foreign income from export. The affect is usually scarcity
in foreign exchange and will further transcend into real exchange rate
depreciation. For such tradeable goods production will fall, employment and
investment will follow suit. This is valid in the short run however; the long
run scenario may be contrary where there is high risk-aversion among firms. Similarly, decreasing import prices in the
face of exchange rate volatility will cause an increase in real incomes which
will encourage consumption but in turn lead to increased unemployment, reduced
wage rate, decrease in real money balances of household and a drop in
consumption pattern. (Krugman, Obsteld, & Melitz, 2002). These
has been identified a peculiar problem for SSA countries where exchange rate is
tied to volume of trade for export.
Over
the years, a couple of exchange rate reforms have been embarked upon by various
SSA countries to help deal with highly volatile exchange rate, dwindling
government revenues, collapse of most social and economic infrastructure, sharp
reduction in FDI inflows in the region (Raji, 2012). The SSA
countries operate similar exchange rate arrangement and have reformed these
arrangements by moving away from floating and fixed exchange rate regime to managed
float regime. In addition to these reforms in the exchange rate arrangements,
the SSA countries have utilized other policy instruments such as exchange rate
devaluation, revaluation, among others to deal with highly volatile exchange
rate in the region (Anothony & Kwame, 2008).
There is no doubt that maintaining an undervalued
currency can encourage economic growth and thus have been considered as the
“beggar thy neighbor effect” this often leads to competitive devaluation with
measures of harmful oriented results for the economies. Thus, these reforms
instituted by the various SSA economies have failed to mitigate the problem of
exchange rate volatility in the region and corresponding negative effect on the
growth of the economy. The Figure 3 below shows the GDP growth rate of Oil
Producing countries within the Sub-Saharan African in relation to exchange rate
movement.
Data Source: World
development indicator and OPEC statistical bulletin (2021)
Figure 3: Gross domestic
product growth rate of selected oil producing countries in Sub-Saharan African
Many literature have documented research works in this
respect but the controversial outcomes from these literatures have necessitated
the need to advance this nexus between exchange rate volatility and economic.
Lots of these studies have related this relationship to a negative nexus while
others opines that the joint relationship of exchange rate volatility and
economic is positive (Ahmed & Park, 2004).
Inferring from these studies, a negative relationship would imply that growth
levels in GDP are unstable driven by changes in exchange rate regimes and
policy especially in SSA countries.
This
study is therefore intended to ascertain how exchange rate volatility in oil
producing countries in Sub- Saharan African impact on economic growth; determine
whether any of the macroeconomic risks such as inflation rate, exchange rate
risk, interest rate risk studied has symmetric effect on economic growth; and
whether country specific factors determine economic growth in Sub-Saharan
African (SSA) countries since little and fewer studies have been devoted to SSA
countries in this area and as such has not been sufficiently established by
policymakers and researchers. This study is therefore motivated by the need to
close the study gap due to the developments in SSA countries over the past few
years with respect to exchange rate volatility and economic growth in the
region. Thus in filling the gap
this study shall focus more on country specific studies of exchange rate
volatility and economic growth in oil producing countries in Sub- Saharan
African. The gap in literature is extensively explained in the next chapter.
1.3 RESEARCH QUESTIONS
1.
How does exchange rate volatility of oil producing countries in Sub-Saharan
African
impact on Economic growth?
2.
How does economic growth in oil producing countries in Sub-Saharan African respond
to shock
in exchange rate and other monetary instruments?
3.
What are the moderating effects of institutional factors on exchange rate and economic
growth in Sub-Saharan Africa?
1.4. OBJECTIVE OF THE
STUDY
The
broad objective of this study is to examine exchange rate volatility and
economic growth of Oil producing countries in Sub-Saharan African by comparison
analysis, while the specific objectives are
1. To
ascertain if exchange rate volatility of oil producing countries in Sub-Saharan
African impact on Economic growth
2. To
examine the response of economic growth to shocks in exchange rate and other
monetary instruments in oil producing Sub-Saharan African countries
3.
To examine the moderating
effect of institutional
factors on exchange rate volatility and economic growth of oil producing
Sub-Saharan Africa countries.
1.5 STATEMENT OF
HYPOTHESES
H01:
Exchange rate volatility has no significant impact on economic growth of Oil
producing
Sub-Saharan African countries
H02:
Economic growth has no significant response to shock in exchange rate of oil
producing
Sub-Saharan African countries
H03:
Institutional quality has no significant moderating effect on exchange rate and
economic growth of oil producing Sub-Saharan
African countries.
1.6 SIGNIFICANCE OF THE STUDY
The
noteworthiness of this examination depends on the score that among the
exploration works done the impact of exchange rate volatility on economic
growth in the oil producing nations in SSA. Adu–Gyamfi (2011) utilized yearly
information which does not sufficiently address the conduct of conversion scale
unpredictability. This investigation tries to add to the current assemblage of
writing by utilizing information and the GARCH approach. This investigation
will likewise help the administration in planning a conversion standard
strategy structure that will guarantee the decrease in vulnerabilities and
varieties in the exchange rate to improve the progression of exchange and
speculation most particularly capital inflow to encourage monetary development
and increment the welfare of the individuals.
This
research will serve as a guide for effective design of monetary as well as
fiscal policy and implementation for policy makers and planners. It underscores
exchange rate volatility and economic growth in oil producing countries in Sub
Saharan African. It attempts to ascertain how exchange rate volatility in oil
producing countries in Sub Saharan African impact on economic growth and
ascertain whether country specific factors significantly determine economic
growth in the region. Consequently, this research work will help government of
oil producing countries in Sub Saharan African countries, policy makers,
private individuals and the general public to know the best policy option
available for exchange rate volatility and increase economic growth in the
region.
For
the governments of oil producing countries in Sub Saharan African countries and
policy makers, it will make them to carry out stabilization policies that will
minimize country- specific macroeconomic fundamentals that send negative
signals to investors to the barest minimum. This will make investment climate
conductive and help in attracting the right kind of investment for attaining
economic growth in the region.
This
study will as well add to existing exchange rate volatility and economic growth
literature by offering another type of understanding of the exchange rate
volatility and economic growth relationship hence, triggering policy debates in
future while serving as a source of reference and point of departure for
further empirical research within the study area in the zone and the world at
large.
1.7 SCOPE
AND LIMITATION OF THE STUDY
This
examination work is intended to cover the period 1980-2019 a time of thirty-eight
years. The degree comprises of the administrative and deregulatory exchange
rate period for example the fixed conversion standard and the coasting exchange
rate period. The need to examine how some country-specific exchange rate volatility
expose oil producing sub-Saharan countries to exchange rate volatilities in the
region also motivated the choice of this study through the use of high
frequency data to measure volatility. The study also limited its scope to the
variables of interest in the study, that economic growth, exchange rate,
inflation rate, interest rate, and economic growth thus the study shall be
limited to the following oil producing countries in Sub-Saharan African namely
Nigeria, Equatorial Guinea, Gabon, Congo and Angola. This study is largely limited by data inconsistency where
most selected countries data appears missing or not represented. Thus, the
aforementioned countries were found to have complete data vital for this study.
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