Factors Responsible for Movements in Real Effective Exchange Rate of Selected African Countries

Abstract

The study examined the determinants of real effective exchange rate on selected African countries, namely, Nigeria, Libya, Angola, Egypt, Gabon, Ghana, and Chad over the sample period of 1980 to 2023. The vector error correction methodology was used in the study. The results suggest the following findings; In Nigeria, variations in the real effective exchange rate responded significantly and positively to Brent crude oil prices, domestic inflation rate, external debt burden, the volume of foreign exchange reserves, and prices of primary export. It also responded negatively to foreign investment flows. Whenever the real effective exchange rate deviated from its equilibrium, 74% of its disequilibrium was restored in Nigeria. In Libya, the response of real effective exchange rate was positive and significantly related to commodity prices of primary export but responded negatively and significantly to Brent crude oil prices, foreign investment inward stock, and foreign reserve holdings. In addition, 57% of the disequilibrium in the real effective exchange rate of the Libya currency was restored to the long-term value.  In Angola, it was found that the variations in the real effective exchange rate had a positive and significant response with Brent crude oil prices and foreign investment inflows. It however responded negatively with a significance balance of payments and the volume of foreign reserves. About 60% of the disequilibrium in the real effective exchange rate was restored to the long-term value in Angola. In Egypt, the real effective exchange rate responded positively with significance to Brent crude oil prices, foreign investment inflows, and prices of primary export. Additionally, it responded negatively and significantly to the domestic inflation rate and external reserve holdings. Within the period of study in Egypt, 53% of the disequilibrium in the real effective exchange rate was restored to equilibrium. In Gabon, variations in the real effective exchange rate had a positive and significant response with Brent crude oil prices, real interest rate, external debt burden, and the volume of foreign exchange reserves. Also in Gabon, the real effective exchange rate responded negatively and significantly to the inflation rate and prices of primary export. Accordingly, 82% of the disequilibrium in the real effective exchange rate was restored to equilibrium. The Ghanaian real effective exchange rate relative to the dollar responded significantly and positively to Brent crude oil prices, domestic inflation rate, foreign debt burden, and foreign investment flows while it negatively responded to the Ghanaian balance of payment position. Each time the real effective exchange rate of the Ghanaian cedi deviated from its equilibrium value, 79% of its disequilibrium was restored. In Chad, variations in the real effective exchange rate responded significantly but negatively to the domestic inflation rate while it positively and significantly responded to Brent crude oil prices, external balance position, the volume of foreign reserve holdings, and foreign direct investment inflows. Also, whenever the real effective exchange rate deviated from its equilibrium value in Chad, 65% of its disequilibrium was restored in the long run. Based on these results, policymakers should focus on addressing structural constraints, commodity price fluctuations, and improve the business environment by anchoring policies of economic stability to boost competitiveness in trade and industry. There is also the need for policymakers to consider country-specific factors when formulating exchange rates.