Effect of oil price volatility on the trade balance in sub‐Saharan Africa

Abstract

AbstractCrude oil price volatility as an important driver of the trade balance of economies has been widely documented in the literature. However, studies on the effect of oil price volatility on the trade balance in sub‐Sahara Africa (SSA) are limited. In this paper, we explore the effect of crude oil price volatility on the trade balance across 34 SSA countries using Pooled Mean Group (PMG) and Common Correlated Effect Pooled Mean Group (CCEPMG) estimators for the period January 2004 to December 2017. We find that crude oil price volatility exerts a negative effect on the trade balance of SSA countries. We further demonstrate that inflation, interest rates and exchange rates are significant transmission channels for oil price volatility to impact trade balance. We suggest that policymakers hedge as well as adopt price‐smoothing schemes to minimise the volatility of oil prices on trade balance. Again, countries should adopt an inflation‐targeting regime to ensure the stability of the general price level. Finally, central banks of the respective countries should apply a combination of foreign exchange market interventions and interest rate changes to reduce the effect of oil price volatility on their trade balance when the exchange rate is taken into account.