International Economics

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Exchange rate depreciation and the structure of sectoral prices in Nigeria under an alternative pricing regime, 1986—89
(AERC, 1994-11-06) Ajakaiye, Olu; Ojowu, Ode
Exchange Rate Volatility and NonTraditional Exports Performance: Zambia, 1965–1999
(AERC, 2008-11-03) Anthony Musonda
This study estimated an error correction model of the impact of real effective exchange rate volatility on the performance of non-traditional exports for Zambia between 1965 and 1999. Using a generalized autoregressive conditional heteroscedasticity (GARCH) measure of real exchange rate volatility, the findings show that exchange rate volatility depresses exports in both the short run and the long run. The results also suggest that supportive macroeconomic factors are important in enhancing non-traditional exports in the country. This requires packaging a set of incentives aimed at removing anti-export bias policies so as to promote exports, particularly of non-traditional products, given their standing in the economic growth agenda for the country.
Intra-Regional Foreign Direct Investment In SADC: South Africa and Mauritius Outward Foreign Direct Investment
(African Economic Research consortium, 2017-03-30) Nkuna, Onelie B.
This paper looks at intra-SADC (Southern African Development Community) Foreign Direct Investment (FDI) and focuses on Mauritius and South Africa’s outward FDI. Data from 1999 to 2010 are collated and qualitative analyses conducted. The study reveals that Mauritius’ outward FDI was mainly in the service sector and largely went to Madagascar, Seychelles and Mozambique, which were also the country’s main trading partners, except for Botswana. Meanwhile, South African investments were mainly in Mauritius, Tanzania and Mozambique, while the country’s main trading partners were Botswana, Zambia, Zimbabwe, Swaziland and Angola. The study also found the following to be potential drivers of Mauritian and South African outward investments, and hence intra-SADC FDI flows: geographical proximity, market access, liberalized markets, stable macroeconomic and political environment, natural resource availability, and policy and institutional framework. Graphical analyses and simple correlations reveal that trade and FDI are positively correlated for Mauritius and South Africa’s outward investment, suggestive of a complementarity relationship.
Export Instability and Economic Growth in Nigeria: A Time Series Analysis
(African Economic Research consortium, 2017-04-23) Oladipo, Olajide S.
Primary products and commodities are sources of raw material, and provide food and livelihood for many families and communities. They also provide export earnings and income for many governments in developing countries. In Nigeria, and other sub-Saharan Africa countries, primary products and commodities are at the heart of local economies and sometimes national economies. However, over the years, prices of primary products and commodities have been very volatile, with serious implications for economic growth. As a response, this study investigates the impact of export instability on economic growth in Nigeria using time series data from 1970q1 to 2011q4 and an econometric approach that addresses the problem of non-stationarity. As a departure from previous studies, the paper uses an instability measure that varies over time and a relatively large data sample size. Our results show that export instability has negative effects on economic growth and investment. The policy recommendation is that to smoothen Nigeria’s financial standing in the short run, the government should ensure the national sovereign wealth fund (NSWF) is properly managed given the unpredictability of the global export market. A long term strategy is the continuation and intensification of government efforts to diversify the export base of the country. The export sub-sector should be diversified by increasing the share of non-traditional exports.
Determinants of Short-Term Foreign Debt in Ghana
(African Economic Research consortium, 2017-04-30) -Insaidoo, William Gabriel Brafu
This study tests the validity of the hypothesis that the regulatory and macroeconomic environments and the disparity between domestic and international interest rates are important determinants of short-term foreign debt stock in Ghana. This involves a time series econometric analysis of annual secondary data covering the period 1970 to 2012. More specifically, the bounds testing approach is used to estimate the impact of potential determinants – identified in the theory and empirical literature – on the real stock of shortterm foreign debt in Ghana. The study finds that a reduction in regulatory restrictions on external borrowing, a widening of the disparity between domestic and international interest rates, economic growth performance and domestic financial deepening lead to increases in the short-term foreign debt stock in both the long and short run, respectively. The short-term foreign debt stock reduces in response to an increase in trade openness in the short run, and to international debt relief initiatives by multilateral development institutions in the long run.
Exchange Rate, Petroleum Price and Price Determination in Sierra Leone
(AERC, 2018-12-01) Kargbo, B.I.B.
The Sierra Leone economy is a net importer with a chronic negative balance of trade. Imports as a percentage of GDP averaged 40.8% between 2001 and 2010. Imports of food, mineral fuels and lubricants accounted for 50.8% of the total value of imports within the same period. Also, the value of the leone depreciated from Le 920.75 in 1996 to Le 4,000 in 2010 while inflation averaged 12.6% for the same period. As a result of the interplay of these forces, fuel prices are most times adjusted upwards to compensate for the depreciation of the leone against the dollar or to match up with increases in the world price of crude oil. This study determines the effects of monetary environment as well as exchange rate movement and petroleum prices on domestic prices in Sierra Leone by estimating a hybrid model of inflation in which inflation responds to its own lags, lags of other variables, and a set of error-correction terms that represent short run disequilibria from the money market, external sector and output that feed into the inflation process.The empirical results from the parsimonious model show that petroleum product prices and exchange rate, as well as monetary factors determine inflation in Sierra Leone.What is also significant from the findings is that the contribution of petroleum prices to domestic price formation is unfounded in the long run, meaning that it is only a short-run phenomenon. The results also support the view that a fair portion of fluctuations in domestic prices is driven by its own shocks.
Copper Price and Exchange Rate Dynamics in Zambia
(AERC, 2019-12-03) Chipili, Jonathan
The kwacha/US$ exchange rate has fluctuated widely post-liberalization period, with large changes attributed to the copper price booms and bursts due to the significant contribution of copper to the Zambian economy. Copper mining is the major source of foreign exchange, contributing over 70% of total export earnings. Largely commodity-dependent economies are, however, vulnerable to commodity price fluctuations as principal commodity exports have a significant bearing on the overall performance of the economy. Thus, the copper price-kwacha/US$ exchange rate relationship is examined in the cointegration framework over the period 1994.1- 2012.4 against the background of mixed empirical evidence from previous studies. The analysis is augmented by examining the influence of endogenously detected specific events underlying copper price movements on the kwacha/US$ exchange rate. The estimation results reveal the existence of a long-run equilibrium relationship between the real copper price and the real kwacha/US$ exchange rate. A positive shock to the copper price shifts the kwacha/US$ exchange rate to a new equilibrium level. External factors underlying copper price movements tend to increase persistence in the volatility of the kwacha/US$ exchange rate. Nevertheless, the copper price has a weak short-run effect on the exchange rate. Monetary authorities should, therefore, closely monitor underlying movements in the copper price to ensure that external competitiveness of the economy is safeguarded and macroeconomic stability is maintained.
The foreign exchange market and the Dutch auction system in Ghana
(AERC, 2020-04-27) Dordunoo, Cletus K.
The foreign exchange market in Ghana prior to the economic reform process was characterised by three major features, namely, an excessively overvalued official exchange rate; a thriving black foreign exchange market; and an allocation of official foreign exchange based on import licensing arrangement issued by an Import Programming and Monitoring Committee. In order to rationalize the official exchange rate, absorb the parallel sub-market into the legal market, allow the forces of demand and supply to determine the rate and allocation of foreign exchange, and to achieve a convergence of the official and parallel rates, the Government adopted a series of exchange reform measures. Initially, the cedi was devalued in stages, followed by the use of purchasing power parity rule in determining exchange rate on quarterly basis for about three years. Later a weekly auction based on the Dutch auction system was introduced with two windows and later merged into one window. The import licensing arrangement was abolished. The Dutch auction system was utilized for about 6 years (on retail basis for 4 years and wholesale for 2 years). Also, foreign exchange bureaux were established to legalize the parallel market operations. Despite the foreign exchange support from several multilateral and bilateral agencies, as well as the extensive institutional reform, and a stable macroeconomic environment, the convergence of the auction and the bureaux rates took over 5 years to achieve.
The determinants of the real exchange rate in Zambia
(AERC, 2020-04-27) Mungule, Kombe Oswald
This paper attempts to explain the movements of Zambia’s real effective exchange rate using a vector error correction model and quarterly time series data between 1973 and 1997. The study results are similar to most studies about the nature of the determinants of the real exchange rate. Through the use of purchasing power parity tests, impulse response and variance decomposition functions, the study indicates that Zambia’s real effective exchange rate depends significantly on the prevailing real fundamentals, price differentials and real shocks
Exchange rate policy and the parallel market for foreign currency in Burundi
(AERC, 2020-04-27) Nkurunziza, Janvier D.
Government control over the allocation of foreign exchange in Burundi has led to the creation of a parallel market for foreign currency. Despite its negative impact on Burundi’s economy, this market has not, so far, attracted the attention of researchers. This paper looks at the functioning of the parallel market and discusses macroeconomic policies in the country to shed light on the context within which the market evolved. Analysis of time series properties of the variables used in an empirical model covering 1970–1998 reveals that the premium is stationary, guiding the decision to estimate a stationary model of the premium. Econometric results show that the premium is determined by the expected rate of devaluation, trade policy variables and GDP growth. This conforms with empirical studies on other African countries, although the Burundian case is particular in one respect: The market is characterized by a relatively low premium, which, as a stationary variable, is also generated by stationary fundamentals, in contrast with findings for other African countries. This particularity reflects a relatively more flexible exchange rate policy over the sample period. In terms of policy, the paper argues that political stability and more fundamental changes in Burundi’s economy and its management will be needed to ensure the success and sustainability of the current foreign exchange reforms.
Do Governance Institutions Matter for Trade Flows between Sub-Saharan Africa and its Trading Partners?
(African Economic Research consortium, 2020-06-04) Adewuyi, Adeolu O.; Olubiyi, Ebenezer
This study analyses the role of governance institutions in trade involving Sub-Saharan Africa (SSA) and its trading partners. Specifically, the objectives of this study are to: investigate the effect of institutions on trade between SSA and its trading partners; and examine whether governance institutions matter more for trade in SSA resourcepoor countries (or non-mineral products) than for trade in resource-rich countries (or mineral products). Based on a combination of strands of literature on the subject matter, we used a modified gravity model to analyse the objectives highlighted above. Using data spanning 1996 to 2014, empirical analysis involves estimating variants of gravity equations using the modified Poisson pseudo maximum likelihood estimation approaches. Empirical results show that not all governance variables matter for trade between SSA and its partners. Whether it matters or not depends on countries’ resource endowment, the pattern of trade and the direction of trade. Trade between SSA and developed countries (especially imports) is driven significantly by governance institutions, particularly the bureaucratic quality and compliance with law and order. Such importance of governance institutions could not be established in trade between SSA and Asia, which are both developing economies. Furthermore, governance institutions matter more for trade in non-mineral products than for trade in mineral products. The interaction of tariff with governance variables produced some results which suggest that inadequate governance institutions reflected in poor implementation of tariff policy may increase trade costs, thus reinforcing the negative effect of tariff on trade. Some policy recommendations were articulated to improve governance institutions in SSA to promote trade with its trading partners.
International Commodity Prices and Inflation Dynamics in Sierra Leone
(AERC, 2020-07-27) Danladi, Jonathan D.
This study examines the impact of international commodity price changes, measured in local currency, on consumer prices in Sierra Leone. Monthly data from January 2007 to August 2016 are used to examine the long-run relationship and the short-run dynamics. The study finds the dynamics of cocoa, oil and rice prices as significant determinants of domestic consumer prices both in the long-run and the short-run. Domestic consumer prices are shown to respond negatively to rising cocoa prices, one of the country’s major export commodities. The study suggests deliberate efforts on the part of authorities for the improvement and expansion of production base of the country’s export commodities such as cocoa and rice, which the country has comparative advantage, to reduce the pressure on the local currency and the prevalent upward trend of consumer prices. A diversified energy source and an active production sector can reduce the overdependence on oil and, ultimately, the direct pass-through of commodity price fluctuations to consumer prices in the economy
Regional Integration and Cross-Border Mergers and Acquisitions in Africa: 2000-2014
(African Economic Research consortium, 2020-11-10) Wilson, Magdalene Kasyoka; Alain Pholo Bala, Alain Pholo
In this paper, we examined how regional integration affected cross-border M&A in Africa for the period 2000 to 2014 using a structural gravity model. We found that customs unions in Africa, specifically Southern Africa Customs Union (SACU) and the East African Community (EAC) are significant drivers of M&A by firms from within the unions but not those from outside, perhaps due to their relatively small size. This finding suggests that the depth of regional integration determines intra-regional M&A flows in Africa. Findings from this paper suggest that African governments need to strengthen the existing regional integration arrangements, as the case of SACU and EAC indicates, to benefit from intra-African cross-border M&A flows.
Do Domestic Firms Learn to Export from Foreign-Owned Firms? Evidence from Kenya
(African Economic Research consortium, 2020-12-10) Kinuthia, Bethuel Kinyanjui
Attracting inflows of foreign direct investment (FDI) has been a major concern of most governments in developing countries. FDI is believed to bring many benefits to the host countries in terms of productivity, employment, and technology, among other benefits. This paper investigates the existence of export spillovers in Kenya for the period 2000-2005 using firm level panel data. More specifically, the paper analyses export spillovers in the manufacturing industry and the channels of transmission of such spillovers. Using a linear probability fixed effects model, the results show that foreign-owned firms may positively affect the decision of domestic firms to export through the demonstration effects. However, FDI could result in negative spillovers through the competition effects. There is also evidence of self-selection, where only the most productive firms venture into the export market. Therefore, policies aimed at encouraging firms increase their productivity will increase domestic firms’ participation in the export market
Foreign Ownership and Productivity Growth: Firm Level Evidence from Cameroon
(AERC, 2021-05-04) Njikam, Ousmanou; Leudjou, Roland Rostant Njiteu
Using a panel data set on Cameroonian manufacturing firms from 1993 to 2005, this paper evaluates the direct and indirect effects of the presence of foreign ownership on the productivity growth of local firms. We investigate spillovers through horizontal and backward linkages, differentiated by the country of origin of foreign investors. The paper also investigates whether and how the absorptive capacity of Cameroonian indigenous firms moderates the effect of foreign presence on productivity. Controlling for the degree of competition, our results indicate that foreign firms perform better than Cameroonian indigenous firms. We find evidence of negative intra- and interindustry spillovers. The analysis also produces evidence of negative spillovers from American, European and Asian affiliates through backward linkages. These negative horizontal and vertical productivity spillovers are mainly due to the limited absorptive capacity of Cameroonian firms, i.e., firms with the highest levels of absorptive capacity suffer the less from foreign presence. The results are robust to the use of different specifications.
Where are the Dynamics of Export Diversification in Ethiopia?
(AERC, 2021-05-06) Kebede, Birhan Eshetu
With the export promotion strategy, Ethiopia has tried to increase export earnings by exporting more in terms of volume and number of commodities. It has also formulated different strategies and undertaken various policy changes. Among such changes is the commitment to trade integration as revealed in existing trade negotiations. The export basket is dominated by coffee, but its share is shrinking because there are a few other new export items entering the exports basket, such as cut flowers, textile products and some processed goods. While Gravity Model is widely used to identify the determinants of trade, it is wise to employ product-destination descriptive matrix to analyze export diversification and identify the relevant factors that practically influence Ethiopia’s export performance. Based on the analysis for Ethiopia, the top 20 export commodities are contributing more than 80% of export earnings, but the performance of the new export items such as textile and textile articles is promising. Among the fastest growing exports, most of them are value added products such as vehicle parts, and the respective export earnings have grown by multiple times in 2013 compared to the value in 2004. At HS 6-digit level, among 316 New Products to Old Destinations (NPOD), 84 are from textile and textile articles and, though the values per each export are low, there are also 74 new exports in vehicles, aircraft, vessels and associated transport equipment. The major destinations of these dynamic products are the EU, North America, China, Middle East, Africa and India. Thus, the major factors that play a pivotal role in the export performance and diversification in Ethiopia are institutional and structural changes, trade facilitation and export priority, infrastructure improvements, foreign firm participation, trade promotion and preferential market access, stretched objectives and declining bilateral trade costs.
Determinants of Imports in Guinea
(African Economic Research Consortium, 2021-07-16) AGBENO, Yao
The objective of this paper is to examine the factors that influence Guinea’s overall import demand using annual data covering the period 1980-2015. Through the Error Correction Model (ECM), we estimated the short- and long-term relationships to measure the effect of real investment expenditure, real effective exchange rate, real final consumption demand and trade policy on import demand, after testing the existence of a cointegration relationship between the different variables of the model. The results showed that in the short term as in the long term, the demand for real investment, the real demand for final consumption and the trade policy based on the adoption of the new tariff system from 2005 are the main determinants of the import request in Guinea. These results allowed us to draw some implications for economic policy
WTO Trade Facilitation Measures and the Extensive Margin of Exports in the Tripartite: Comesa – EAC – SADC
(African Economic Research Consortium, 2021-08-06) Leudjou, njiteu roland
This study uses a gravity model for the year 2015 to analyze the impact of the World Trade Organization’s (WTO) Trade Facilitation Agreement (TFA) on extensive margin of exports (export diversification proxied by the number of products exported) by the Tripartite (COMESA, EAC and SADC) country members. It appears that all trade facilitation measures (except “fees and charges”) have a positive and significant effect on export diversification irrespective of the type of product or trading partner. “Appeal procedures” (the rights to traders to obtain review and correction of decisions made by Customs officials in an administrative and/or judicial proceeding) measures have the most critical effect. Exports within the Tripartite are more impacted than exports with partners outside the region. The increase in number of exported products is higher for commodities than for manufactured goods with intra-tripartite exports, whereas the opposite is observed with exports to partners in the rest of the world. Counterfactual analysis shows that if the Tripartite countries comply with regional best practice (or the WTO requirement) in trade facilitation, “advance rulings” (binding information about customs treatment of goods before imports) and “appeal procedures” measures would have the greatest effect on exports diversification respectively within the Tripartite, and with the rest of the world. SADC trade facilitation policies perform better than the EAC’s and COMESA’s, regardless of the type of product, partner or trade facilitation measure (except for “fees and charges”). The EAC performs better than COMESA. This study recommends implementing the WTO TFA which could increase export diversification both within the Tripartite Free Trade Area and with rest of world partners

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