Abstract
Despite rising interest in African economies, there is little prior research on the determinants of exchange rate movements in the region. This paper examines the monthly exchange rates of the country members of the Southern African Development Community (SADC) from 1990 to 2010 inclusive. Long-run equilibrium exchange rate models are established, exchange rate determinants are identified, and ex-post forecasts are generated for a period of 18 months (Sekantsi, 2011). The autoregressive distributed lag (ARDL) cointegration model is used in this paper, given its statistical advantages over commonly, applied cointegration techniques. Findings show that the ARDL method generates accurate forecasts for eight out of 11 sampled exchange rates. In keeping with earlier literature (e.g., Redda & Muzindusti, 2017; Zerihun & Breitenbach, 2017; etc.), findings suggest that the chances of SADC member countries fulfilling the requirements of a currency union are quite low. This paper marks one of the first attempts in the literature to forecast exchange rates in SADC using the ARDL approach (Pesaran & Shin, 1995). The results would be of interest to policy-makers, researchers and investors.
Highlights
Africa has a long tradition of regional cooperation, its trade and monetary integration schemes being the oldest in the developing world
This paper examined the relationship between exchange rates and fundamentals in Africa with a particular focus on Southern African Development Community (SADC) using the autoregressive distributed lag (ARDL) cointegration approach
The method delivers good results for most exchange rates indicating that countries in the region reached a certain stage of development as changes in exchange rates seem to respond to changes in macroeconomic aggregates
Summary
Africa has a long tradition of regional cooperation, its trade and monetary integration schemes being the oldest in the developing world. Since the beginning of the 1990s, African regional cooperation has been revitalised due to two main developments; firstly, the abolition of the apartheid regime in South Africa and secondly, the transformation of the organisation of African unity into the African Union (AU). The latter launched the New Partnership for Africa’s Development (NEPAD) initiative in 2001 which considers regional economic communities as building blocks for pan-African integration and has among its aims a common African currency. The AU has agreed in principle, to implement monetary union and a single currency in Africa based upon the prior formation of regional monetary unions, including one in the SADC region (Jeffries, 2007; Redda et al, 2017)
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