Abstract
Sub-Saharan African countries run many current account deficits in the context of the new world economic order, namely globalization. The theoretical literature reveals that the real exchange rate improves the sustainability of the current account deficit, the effect of which may differ according to the type of exchange rate regime. Empirically, the authors are not unanimous on this issue. This paper analyses the effect of the real exchange rate on the sustainability of current account deficits in Sub-Saharan African countries over the period 1980-2016. Using a logit model applied to a panel of 38 countries and estimated using the maximum likelihood method, it appears that the depreciation of the real exchange rate has a positive effect on the sustainability of the current account deficit. This effect depends on the type of exchange regime. Under a floating exchange rate regime, the real exchange rate acts positively on the sustainability of the current account deficit when this rate is less than or equal to 250. On the other hand, under an intermediate exchange rate regime, the real exchange rate increases the sustainability of the current account deficit when the rate is between 275 and 600. In the case of the fixed exchange rate regime, the real exchange rate has a positive effect on the sustainability of the current account deficit if the rate is greater than or equal to 700. In the light of these results, the paper suggests to policymakers, the use of the real exchange rate to improve the sustainability of current account deficits. These policymakers should use real exchange rates below 250 for countries adopting a floating exchange rate regime, between 275 and 600 for the intermediate exchange rate regime, and greater than 700 for the fixed exchange rate regime.
Highlights
The study of the role of the real exchange rate in the sustainability of current account deficits is of particular interest in the literature
In the particular case of Sub-Saharan African (SSA) countries, they are experiencing persistent current account deficits, which have risen from an average of 1.3 per cent of gross domestic product (GDP) in 1980 to 4 per cent in 2016, an increase of 2.7 percentage points, according to International Monetary Fund (IMF) World Economic Outlook (WEO) data
This paper analysed the effect of the real exchange rate on the sustainability of the current account deficit of SSA countries over the period 1980-2016
Summary
The study of the role of the real exchange rate in the sustainability of current account deficits is of particular interest in the literature. The classical tradition emphasizes the self-regulating capacity of the market, while believing that by virtue of the flexibility of domestic prices, the imbalance adjusts automatically From this perspective, any measures to improve the sustainability of current account deficits remain unnecessary. Very little work integrates geographical affiliation in the analysis of the relationship between the real exchange rate and the current account balance, and the results may vary from one subregion to another. This article takes these different aspects into account. The main results obtained in this paper show that the real exchange rate has an overall positive effect on the sustainability of the current account deficit in SSA countries. The last section concludes the study and provides implications of economic policy
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