Current Account Balances, External Debts and Exchange Rates in Selected African Countries

Abstract

Most African countries had been bedeviled by the problem of deficits in their current account balances (World Bank, 2020). In a bid to overcome this challenge, they usually resorted to contracting external debts from institutions and countries that required them to repay these loans in the currencies of the creditors. Thus, the rate of exchange between the creditors and debtors should be of concern. Several studies have been carried out to examine the relationship between current account balances, external debts and the exchange rates. Some studies found a unidirectional relationship among these variables. In some other studies, the relationship knitting these variables was bi-directional. In most of these studies, the methods of analysis ranged from the ordinary least squares, panel data analysis and the vector error correction model. This study fills the gap in the literature by examining the relationship across these variables making use of the generalized methods of moments (GMM). The GMM estimation technique will correct for unobserved heterogeneity, endogeneity and measurement errors which were observed in the data. The study found that a 9.46% increase in external debts leads to a percentage increase in current account balances in the selected African countries. Also, there is a positive and significant relationship between the exchange rates and the current account balances in the group.