EXCHANGE RATE VOLATILITY AND ECONOMIC GROWTH OF SELECTED OIL PRODUCING COUNTRIES IN SUB-SAHARA AFRICA: EVIDENCE FROM PANEL DATA

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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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