An Analysis of Real Oil Prices and Real Exchange Rates in Five African Countries
| Author | Zulkornain Yusop,Normaz Wana Ismail,Abubakar Lawan Ngoma |
| Published date | 01 May 2016 |
| DOI | 10.1177/0015732515625718 |
| Date | 01 May 2016 |
| Subject Matter | Articles |
An Analysis of Real
Oil Prices and Real
Exchange Rates in
Five African Countries:
Applying Symmetric
and Asymmetric
Cointegration Models
Abubakar Lawan Ngoma1
Normaz Wana Ismail2
Zulkornain Yusop2
Abstract
This article examines the long-run interactions between real oil prices and real
exchange rates in five oil-exporting African countries: Egypt, Ghana, Nigeria,
South Africa and Tunisia. To accomplish this, symmetric and asymmetric cointe-
gration tests and an error-correction modelling technique are applied. The results
of the analysis reveal evidence of long-run co-movements between real oil prices
and real exchange rates. More specifically, this involved symmetric adjustment of
the real exchange rates to the long-run equilibrium values in Egypt, South Africa
and Tunisia, caused by changes in real oil prices. Further evidence of persistence,
as well as asymmetric adjustments of the real exchange rates to the long-run
equilibrium path, were found to exist following an increase in oil price shocks
in Ghana and Nigeria. Moreover, the analysis of short-run dynamics between
real oil prices and real exchange rates produces evidence of real exchange rate
appreciations in Nigeria, South Africa and Tunisia and real exchange rate fluctua-
tions in Egypt and Ghana.
JEL: C32, F31, Q43
Keywords
Oil price, real exchange rate, cointegration, asymmetry, Africa
Foreign Trade Review
51(2) 162–179
©2016 Indian Institute of
Foreign Trade
SAGE Publications
sagepub.in/home.nav
DOI: 10.1177/0015732515625718
http://ftr.sagepub.com
Corresponding author:
Abubakar Lawan Ngoma, Department of Economics and Development Studies, Faculty of Arts,
Management and Social Sciences, Federal University Gashua, P.M.B. 1005, Yobe State, Nigeria.
E-mail: alhajingoma@yahoo.com
1 Faculty of Arts, Management and Social Sciences, Federal University Gashua, Yobe State, Nigeria.
2 Faculty of Economics and Management, Department of Economics, Universiti Putra Malaysia.
Article
Ngoma et al. 163
Introduction
For oil-exporting countries, changes in the terms of trade are primarily influenced
by fluctuations in world oil prices (Amano & van Norden, 1998a; Backus &
Crucini, 2000; Frankel, 2010). More specifically, an increase in the price of oil
can lead to improvements in the terms of trade in oil-exporting countries in the
long run if the countries raise the relative price of exports in terms of imports.1
This may create a surge in domestic wealth that triggers excess demand, placing
upward pressure on these countries’ real exchange rates, as domestic spending on
non-tradable goods increases and relative prices rise. Conversely, a fall in the
world oil price can lead to deterioration in the terms of trade in the oil-producing
countries, thereby depreciating their long-run equilibrium real exchange rates.
Thus, fluctuations in the prices of oil may be a source of macroeconomic insta-
bility, particularly in small developing countries that heavily rely on the export of
such a commodity. An increase in oil prices can exert innovations in the long-run
equilibrium real exchange rates, leading to persistent misalignments. Such an effect
on the real exchange rates can undermine competitiveness, especially in the other
sectors, create distortions in resource allocations, and trigger current account imbal-
ances that could hinder growth possibilities (Arghyrou & Chortareas, 2008; Bodart,
Candelon, & Carpantier, 2012; Goyal, 2014; Servén, 2003; Tandon, 2014).
In view of this, a number of studies (Bodart, Candelon, & Carpantier, 2012;
Coudert, Couharde, & Mignon, 2011; Dauvin, 2014; Jahan-Parvar & Mohammadi,
2011; Korhonen & Juurikkla, 2009) have been conducted on oil-exporting devel-
oping countries2 with the purpose of better understanding the long-term relation-
ship between changes in real oil prices and fluctuations in the real exchange rates.
While African countries are a subset of the total number of developing
countries, little attention has been empirically paid to the impact on their real
exchange rates of changes in real oil prices, particularly in the oil-exporting
countries of the region. That being said, a number of African countries (e.g.,
Nigeria, Algeria, Libya and Angola) appeared among the world highest net oil
exporters.3 Africa, on average, contributes to 10.9 per cent of the global total of
daily crude oil production (BP Statistical Review, 2013). In addition, apart from
being oil net-exporters, these countries also import refined oil for local
consumption. Hence, fluctuations in the world prices of oil may have important
implications on their real exchange rate movements (Alege & Osabuohien, 2015).
Figure 1 shows graphical illustrations of real exchange rates and real oil prices in
five oil-exporting African Countries based on author’s estimations.4
Consequently, this study aims to examine the ability of changes in real oil prices
to explain long-run fluctuations in real exchange rates while accounting for asym-
metric adjustment, in five oil-producing African countries.5 The existing studies
have confirmed the role of real oil price variations in influencing the long-run evolu-
tion of real exchange rates. However, another source of concern is the implicit
assumption of symmetric adjustment of the real exchange rates to the long-run equi-
librium values, caused by changes in real oil prices in most of the studies that used
a traditional residual-based Engle and Granger (1987) cointegration test or a VAR-
based Johansen (1988) cointegration test. A number of reasons may imply long-run
real exchange rate adjustments to changes in real oil prices to be asymmetric.
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