Trade-Exchange Rate Nexus in Sub-Saharan African Countries
| Published date | 01 August 2015 |
| Author | Evans S. Osabuohien,Philip O. Alege |
| DOI | 10.1177/0015732515589440 |
| Date | 01 August 2015 |
| Subject Matter | Articles |
Trade–Exchange Rate
Nexus in Sub-Saharan
African Countries:
Evidence from Panel
Cointegration Analysis
Philip O. Alege1
Evans S. Osabuohien1
Abstract
This study explores international trade–exchange rate interaction in sub-
Saharan African (SSA) countries. Based on partial equilibrium analysis, we
develop two equations for export and import in which exchange rate, real gross
domestic product (GDP), stock of capital and technology are the independent
variables. The results from empirical analyses show that export and import are
inelastic to changes in exchange rate. It follows that depreciation of currencies
in the region may not have the expected results in view of the structure of
the economies and export compositions. In the same vein, depreciation would
not depress imports but only aggravate balance of payments. Thus, in the
light of the findings, a policy of exchange rate stability that hinges on long-run
considerations, capital accumulation and technological capacity as well as the
maintenance of comprehensive coherent macroeconomic packages remains a
critical factor in ensuring that exchange rate policy performs its central role as
a trade facilitation tool.
JEL: F13, F14, F31
Keywords
Cointegration, depreciation, exchange rate, exports, imports, panel data, sub-
Saharan Africa, trade
Article
Foreign Trade Review
50(3) 151–167
©2015 Indian Institute of
Foreign Trade
SAGE Publications
sagepub.in/home.nav
DOI: 10.1177/0015732515589440
http://ftr.sagepub.com
Corresponding author:
Evans S. Osabuohien, Department of Economics & Development Studies, Covenant University,
P.M.B. 1023, Ota, Nigeria.
Emails: pecos4eva@gmail.com; evans.osabuohien@cu.edu.ng
1 Department of Economics and Development Studies, Covenant University, Ota, Nigeria.
152 Foreign Trade Review 50(3)
Introduction
Most sub-Saharan Africa (SSA) countries, especially within the context of regional
economic integration, have over the years undergone some measures of real
foreign exchange rate (EXR) depreciation. This was particularly witnessed in the
mid-1980s with the incorporation of EXR reform as a component of structural
adjustment programme (SAP). One of the major aims of such an EXR policy was
to balance the worsening terms of trade at that time and with a view to improving
foreign trade performance (Ndlela & Ndlela, 2002).
The relative effectiveness of EXR policy in terms of whether real exchange
rate (RER) deprecation or appreciation improves foreign trade performance in
SSA has been a subject of intense debate. For example, Ndlela and Ndlela (2002)
examined RER and output elasticities of import and exports of eight Southern
African economies (Botswana, Lesotho, Malawi, Mauritius, South Africa,
Swaziland, Zambia and Zimbabwe). The authors found that EXR policy has not
played significant role as a trade facilitation instrument in the Southern African
Development Co-operation (SADC) regional economies. They also noted that the
RER elasticities were generally low, which indicate that though there is consider-
able evidence that the RERs affect trade volumes in the expected directions, the
results were in most cases quite pessimistic regarding the size and effectiveness of
the underlying elasticities.
Several attempts have been made in the literature to empirically investigate this
issue. This article represents another contribution to the debate. It examines the
implications of EXR policies on Africa’s foreign trade. It employs a panel data
analysis of 40 countries in SSA (1980–2008) based on data availability. This article
is in line with the current trend of investigating the time series properties of
variables in order to enhance policy recommendations. Thus, the central argument
of this article is that EXR policy without other components, such as, the enhancement
of capital stock, technological capacity and the maintenance of comprehensive and
consistent macroeconomic policy package, will not deliver the desired function of
foreign trade promotion.
The rest of the article is arranged as follows: the second section undertakes a
brief review of related literature while the third section presents the theoretical
background and methodology used in the article. The fourth section entails the
empirical results while the summary, conclusion and policy recommendations are
contained in the fifth section.
Review of Related Literature
Studies on the impact of EXR on economic performance and, in particular, export
and import have enjoyed visibility in the advanced and emerging economies.
There is, however, a growing literature on the issue in Africa. Janine and Ayogu
(1995) drawing evidence from South Africa explained that reforms aimed at
removing tariffs and eliminating trade restrictions were consistent with a more
depreciated RER. Thus, the extent of the EXR devaluation may not be sufficient
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