Analysis of Foreign Currencies Exchange Rate and Sudan Macroeconomic Variables

Abstract

Since the beginning of the year 2012, foreign currencies exchange rates against the domestic Sudanese currency saw continuous rise. That happened even though there were universal fluctuations for them due to continuous financial crisis. The continuous appreciations of foreign currencies in Sudan have economic negative impacts. Therefore, the purpose of this study is to estimate the effects of Real Effective Exchange Rate (REER) on Sudan trade balance (TB). The present situation is confusing for all in Sudan with discrepancies in market effective foreign currencies and government declared prices. For example, one US$ in the market is worth 5.2 Sudanese pounds, while government price is only 2.62. That generates deep gap between imports real cost and domestic market values. The same is true for exports which are valued below REER and that minimize producers' profitability. There studies that have investigated in the short-run and long run effects of real effective exchange rate on trade balance. The first group has employed at aggregate level between Sudan and the rest of world. The second group has used the trade at the bilateral level between Sudan and her major trading partners, China as a largest export and import partner of Sudan. Since a country's trade balance behavior is directly depending on real effective exchange rate (REER), foreign income (Y*) and real domestic income (Y), so, we will include all these variables in our model to test the general case (Sudan-world case) and specific case (Sudan-China case). This study uses unit root tests, co-integration techniques, Error Correction Model and impulse response function with time series data covering the periods of 1981Q1-2009Q4. The main findings of this study are that REER have a significant expected impact as positive in long-run and negative in short-run on the Sudan bilateral trade balance with China and on the total trade balance. The Granger Causality test suggests that REER does Granger causes trade balance for all cases of study. The study clearly demonstrates that real devaluations of exchange rate in Sudan have been negatively associated with improvement of trade balance. Hence, devaluation of currency as a whole does not seem to be beneficial for Sudan exports. That is because the country's real economic sectors, agriculture and industry have deteriorated in their productive abilities, mostly due to oil dependency syndrome and negligence of the other economic sectors.