Foreign Exchange Constraints Research Articles

Dominant currency shocks and foreign exchange pressure in the periphery

The spillover effects of a strong dollar and euro, two dominant currencies, on emerging market economies (the periphery) are examined. The paper empirically studies dominant currency shocks on the foreign exchange (FX) constraint, economic growth, external debt, and inflation. Comparing a dollar shock to euro and commodity price shocks, using various empirical methodologies across regimes of trade invoicing and commodity dependence, the paper shows that appreciation of the trade weighted exchange rate (the dollar index) can worsen the FX constraint and decrease growth in the periphery, failing to achieve the conventional macroeconomic adjustments of a competitive currency depreciation. A strong dollar reduces external debt, but a strong euro has the opposite effect. An FX-constraint shock emanating from the periphery appreciates the US dollar, affirming dollar’s safe-haven status. These findings have implications for balance of payments and exchange rate policy management for a larger group of emerging markets and developing economies.

An Analysis of Remittance and Private Consumption in Nepal

In recent decades, the increasing inflow of remittances and their benefits to originating countries have become an emerging issue in migration and development in the world economy. The government and household members of the country of origin have been taking the maximum possible advantages of remittances in various fields, and it is becoming a more stable source of external finance. However, around 80 percent of remittance received by households is used only for consumption purposes in Nepal. Despite the increasing importance of remittance in the Nepalese economy, the relationship between remittance and private consumption has not yet been adequately studied. Hence, the prime objective of this paper is to analyze the effects of remittance on private consumption expenditure in Nepal. The ARDL bounds testing model is employed in the study to identify the effects of remittance on private consumption in Nepal. The time series data for 20 years, 2001-2020, are collected from various government sources, such as the Ministry of Finance, Nepal Rastra Bank (NRB), and the National Statistics Office. This study finds a positive and significant relationship between remittances and private consumption in Nepal. The impact of other control variables like GDP is positive and significant for consumption. However, the consumer price index has a negative effect on consumption. The Nepal government and other concerned agencies should encourage sending remittances only from formal banking channels that could help with capital formation and thereby investment and job creation in Nepal. It also solves the liquidity crisis and foreign exchange constraints in the nation.

THE EFFECTS OF REMITTANCE ON ECONOMIC GROWTH IN NEPAL

The cross-border movement of workers has increased with the enactment of economic liberalization policy, especially after the 1990s in Nepal and increasing globalization in the world. It opened the door to the Nepalese workers in abroad, making their remittance one of the prime sources of foreign exchange earning in Nepal. Consequently, solving the problem of unemployment, remittance become the major contributor in Nepalese economy accelerating overall economic growth of the country; it is the major source of financial savings and thereby investment and growth. Despite the increasing importance of remittance in Nepalese economy, the overall impact of remittance on economic growth has not been adequately explored yet. This paper analyzes the effects of remittances on the economic growth of Nepal. Previous studies have found mixed results regarding to impact of remittances on economy- i.e. positive effects as well as negative effects of remittance on economic growth. So, this paper examines which effect is predominant in Nepalese context. The multiple regression model (OLS) is employed in the study in order to identify the effects of remittances on economic growth of Nepal. The time series secondary data for 20 years, 2001-2020, are collected from various published sources. This study concludes that there is positive and significant relationship between remittance and economic growth in Nepal. The impacts of other control variables, government expenditure and export trade are also positive for growth. However, expenses made on human capital has lagged effect, making insignificant in short run. The government of Nepal and concerned agencies should provide skill development trainings for the Nepalese migrants to increase their income in host countries. Government should encourage migrants to send remittances only from formal banking channels. It even helps for capital formation, investment and economic growth. It also solves the liquidity crisis and foreign exchange constraints in the nation, promoting the infrastructure development on the nation.

Estimating Sierra Leone’s Aggregate Import Demand Function Under Binding Foreign Exchange

The primary objective was to evaluate the extent to which foreign exchange restraints import demand in Sierra Leone. Using time series data from 1980 to 2020, this study determined Sierra Leone's import demand function by including foreign exchange constraints in a structural model developed by Emran and Shilpi (2010). The model compensated for both short-run and long-run links by employing an ARDL bounds-testing technique with an error-correcting mechanism. The result showed that only the presence of a long-run relationship between domestic consumption and import demand was supported by empirical evidence. In the short run, domestic consumption, scarcity premium, and trade liberalization were found to be significant predictors of Sierra Leone's actual import demand. However, in the long run, only domestic consumption was found to be significant. Typically considered as the key determinants of import demand, real effective exchange rates and scarcity premiums were insignificant in both the short and long term. Therefore, the result indicates that Sierra Leone has no short-term foreign exchange constraints. This could be partially explained by the Bank of Sierra Leone's strategy over the years of providing foreign currency to the private sector to assist in the importation of essential goods. The key finding of the study is that Sierra Leone's import demand is not constrained by a shortage of foreign currency.

Determinants of Firms’ Capacity Utilization in Ethiopia

Under-utilization of firms in Ethiopia is an overriding problem which requires empirical evidence pertinent to capacity utilization policy formulation and implementation. Capacity utilization of firms in developed countries ranges from 85 to 100% while in developing countries it is about 65 to 84%. In spite of these, firms’ capacity utilization of less developed countries ranges from 50 to 64% while Ethiopian firm’s capacity utilization is only 36% which is by far the lowest compared to the other world. This under-utilization of firms is the quest for knowing triggering factors. This paper investigates determinants of capacity utilization of firms where the data was collected by the World Bank from 848 firms in 2015 in all regions of the country. Capacity utilization (%) and number of hours of operation per week were measured to capture the determinants of overall capacity maneuver. A seemingly unrelated regression (SUR) model result of multiple equation estimation of the two measures suggested that about 73.64% and 53.57% of the variation, respectively, in capacity utilization and number of hours operated per week were explained by SUR model. The determinant factors which are idiosyncratic to both measures were cost of input measured in monetary terms as a proxy variable for quantity of intermediate goods and raw material, the percentage share of domestic inputs for the establishment, annual fuel cost and access to credit were contributing positively and significantly. However, foreign exchange constraint and foreign input were attributed to affect significantly but have adverse effect for both of the outcome variables. Moreover, capacity utilization and number of hours of operation have positive interdependency. The major contribution of this paper is to employ econometric estimation of capacity utilization and number of hours of operation per week and measures their interaction as well as identifies its determinants at firm level. Keywords : capacity utilization, number of hours of operation per week, seemingly unrelated Regression (SUR), multiple equation models DOI: 10.7176/JESD/13-3-02 Publication date: February 28 th 2022

Co-integration analysis between rice production and exchange reserves with rice consumption in Indonesia

Rice production is increasing every year but Indonesia still to import rice which is directly related to the use of foreign exchange reserves. Volume of rice import is caused by the small amount of rice production. If the volume of rice import is only a small amount means the amount of rice production is large. Large volume of imports will may have impact on foreign exchange reserves and constraints the ability to import raw materials and capital goods needed for development. The purpose of this study is to determine the co- integration between foreign exchange reserves and rice imports in Indonesia. The method used in this study is the Error Correction Model (ECM) analysis. The results of the study showed that there was co-integration of rice production and rice import while there was no co-integration of foreign exchange reserves and rice import that is the variables did not have a long-term relationship.

Rentier States, International Finance, and Governance

The political-science literature is divided on the relationship between resource rents and politics. This may be related to its narrow focus on democracy and on the domestic influences upon governance outcomes. This paper argues that rents are in fact damaging, on balance, but that we need to look at political outcomes beyond democracy while taking account of international causal pathways as well as domestic ones. It also uses the new ICTD dataset while employing regressions with unit fixed effects to avoid omitted-variable bias, The analysis yields two main results. First, a “resource curse” on governance does exist, but in the short term it has more to do with state capacity, corruption, and economic freedom than with democracy or civil liberties. Second, it appears that many of the negative effects of resource abundance are associated with the relaxation of the foreign-exchange constraint — that is, we see them on the current account balance variable more often than on the rents variables. In regressions with five-year lags, the current-account balance appears to constitute the dominant negative influence on democracy and civil liberties — although these effects are not robust to changes in lag length. The main results hold for two measures of resource rents and are robust to the exclusion of observations from the Middle East and North Africa, or observations prior to 1981, and to a “difference GMM” dynamic panel-data analysis.

Exchange market pressure and primary commodity – exporting emerging markets

ABSTRACTThis paper studies short-term sensitivity between exchange market pressure and various domestic and external factors in primary commodity-exporting emerging markets. The paper focuses on the top country-commodity groups in sugar, cereal, fuels, ores and coffee during the pre-peak and post-peak commodity price periods across floating and pegged exchange rate regimes, using the price of crude oil as a general benchmark. Employing a panel model and panel VAR analysis, the paper finds the heterogeneity of response patterns unique to country-commodity groups and exchange rate regimes. According to the results, in flexible regimes, volatility occurs via the foreign exchange market, interest rates, and domestic credit cycles, feeding into the social costs for structurally weaker economies. Hard exchange-rate pegs often result in a drain on international reserves as the terms of trade deteriorate following post-price peaks, leading to unpopular depreciation. These results accentuate concerns over uneven international trade patterns, an open economy’s short-term foreign exchange policy, and speculative capital flows. Such sensitivity has broad implications for macroeconomic balance and the sustainability of implied exchange rate targets in the presence of a foreign exchange constraint across emerging markets.

La fuga de capitales en la Argentina reciente (1976-2018)

En este trabajo, que surge de un proyecto de investigación que analiza el fenómeno de la restricción externa en la economía argentina, se compara la evolución de la fuga de capitales (junto a otras variables de relevancia para su análisis como la deuda externa y los intereses pagados), desde mediados de la década de 1970 del siglo pasado, centrándose en el período 2002-2017 (la posconvertibilidad). Para ello se utilizan diferentes métodos de estimación: el Residual del Balance de Pagos, el de Stocks y el Cambiario (Banco Central). Los resultados indican que entre 1976 y 2015 se extrajeron del sistema financiero nacional unos U$S 277.800 millones, aunque mientras en el período 1976-2001 las divisas provinieron del endeudamiento externo (privado y público), en la etapa 2002-2015 ese rol lo cumplió el superávit comercial. Las evidencias desde 2016 indicarían que nuevamente es el endeudamiento externo público garantiza la exteriorización de activos.

India’s trade policy: Which way now?

This paper delineates the changes in India’s trade policy regime in the larger context of India’s changing development strategy. What started as protection during “planning for industrialization” in an economy with binding foreign exchange constraint in the 1950s evolved to a relatively open economy with lesser barriers to trade. The process of change in the trade sector has been sequential over a relatively long period of time, the process being complemented by wide-ranging policy shifts in other sectors of the economy. However, there is an evidence of rising market-driven entry barriers, which is often thought to impact the trade sector adversely. Along with this, the process of trade policy changes has been reversed with rise in tariff barriers across some sectors in the recent period, which is a cause for concern especially in the context of improving competitiveness of tradeables and growing integration of the domestic economy with the world economy.

Debt and development in historical perspective: The external constraints of late industrialisation revisited through South Korea and Brazil.

Current debates about the role of external finance in development mostly overlook the insights from early development economics that late industrialisation generates a structural tendency to run trade deficits, thereby exacerbating rather than relieving external foreign exchange constraints. The developmental role of external finance is therefore based on its strategic marginal contribution to relieve such constraints. External debt in particular also allows countries to pursue industrial strategies without reliance on foreign direct investment. These insights are revisited in this paper as a critical input to both mainstream and heterodox contemporary scholarship on debt and development. While the mainstream generally avoids discussion of state‐led industrial policy, the heterodox has converged on a view that developing countries should avoid external finance. The contrasting external account histories of South Korea and Brazil are examined to demonstrate the validity of the classic insights and the contemporary fallacies. While the South Korean case speaks much to its geopolitical context, this does not necessarily refute the principle that post‐war late development engenders an intensive demand for external finance, which must be met if industrialisation strategies are not to be stymied, as in the case of Brazil, no matter how effectively domestic strategies are conceived and implemented.

Global Shocks and the Growth Constraints in the Malaysian Economy 1970-2012

A structural dynamic model is developed to assess Malaysia’s external and internal constraints prior to the East Asian crisis. The model computes the resource requirement to move the economy to a more sustainable form of development. In addition, we examine how the 2008 global financial crisis affected economic performance. The calibrated results clearly show the trade-off between the rate of investment and economic growth under the fiscal and foreign exchange constraints. Our results also highlight the importance of the external trade and FDI to achieve a modest growth.

Econometric Models for Forecasting Remittances of Bangladesh

At present, the remittance of Bangladesh (RB) is the largest source of foreign exchange earning of the country. The RB plays a critical role in alleviating the foreign-exchange constraint and supporting the balance of payments, enabling imports of capital goods and raw materials for industrial development. Remittance from overseas migrant workers certainly increases the income disparity between classes of the rural society. Therefore forecasting plays an important role to know the future situation of economic condition. This paper employed the prospective data on RB to derive a unique and suitable forecasting model. The data were collected from Bangladesh Bank (BB) during January, 1998 to December, 2003. The Autoregressive Integrated Moving Average (ARIMA) and the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) models were used to find out the best one. The findings indicated that the ARIMA (0,1,1) (0,2,1)12 and the GARCH (2,1) models were appropriate for our data and the GARCH (2,1) model appeared to be the best one between these.

Remittances and Poverty: A Comparison of Bangladesh and Pakistan, 2000–2016

The aim of this paper is to examine the extent to which the decline in poverty in Bangladesh and Pakistan can be explained by the manifold increases in remittances in both countries and, more importantly, the mechanism through which this worked. The methodology used is not based on sophisticated economic modelling or growth accounting and while some regression analysis is undertaken, its basic approach is to identify the key economic factors that can explain this decline. The basic conclusions are two-fold. The first that there is strong evidence that remittances do not directly flow to either the poor or the poorest households and the main mechanism through which poverty was reduced in both countries is its indirect effect through generating jobs and incomes both overall but more so at the local or district level. Second, the evidence shows that Bangladesh was able to achieve sustained high economic growth in this period as a result of better macroeconomic management which remittances, by easing the foreign exchange constraint, made possible as compared to Pakistan which despite similar increases in remittances was unable to do so. In this case, the much better export performance of Bangladesh (mainly readymade garment) as compared to Pakistan was also an important factor besides remittances.

How can a strong currency or drop in oil prices raise inflation and the black-market premium?

Based on the case of Venezuela, an oil exporter with a multiple exchange rate regime, this paper explains two counterintuitive phenomena. First, a fall in oil revenue can drive a steep rise in inflation by reducing foreign exchange for imports and raising the fiscal deficit financed by money growth. Second, when foreign exchange is rationed, a devaluation of the official exchange rate could produce a transitory fall in inflation by reducing the fiscal deficit and subsidies for buying foreign exchange. The paper also shows that the black market exchange rate can be rising far faster than overall inflation if it is driven by prices in the most distorted goods markets. The channels emphasized in this paper for determining inflation and the black market exchange rate are novel in the literature and may provide avenues of future research on commodity exporters and foreign exchange constraints.

In search of stabilization and recovery: macro policy and reforms in Venezuela

ABSTRACTVenezuela is currently immersed in a severe economic crisis as a result of years of domestic mismanagement and the recent reversal in oil prices. This article attempts to formulate a proposal for stabilization and recovery that includes upfront key policy actions to deal with the drastic foreign exchange constraint. We consider the recovery of foreign currency liquidity to be of paramount importance. This will allow not only the lifting of exchange control and the implementation of a stable and competitive real exchange rate, but also the removal of shortages across the board and output recovery. The recovery of domestic activity will also require supply-side relief in the form of broad deregulation, institutional changes, and a sensible policy to lift price controls. To maintain a stable and competitive exchange rate, we propose a whole set of policy measures for rapid suppression of inflation and the causal mechanisms that have formed over the years. A monetary reform and the support of monetary and fiscal policy for successful stabilization and recovery efforts are also discussed.

Is There a Role for Independent Monetary Policy in Barbados?

Conventional monetary theory holds that a country can only possess one nominal anchor in the long run. With an open capital account, the country must decide between an exchange rate target or independent monetary policy. The latter implies inflation targeting with a benchmark interest rate reacting to output gap, inflation gap and possibly a macro-prudential variable. This paper addresses this question in the context of Barbados by exploring a novel channel of the transmission mechanism. We argue that shocks to the foreign exchange constraint engender dynamic changes in bank assets, bank liquid assets, aggregate output and price level. Therefore, an examination of the transmission mechanism in small economies requires that the foreign exchange constraint be taken into account. There is tentative evidence that the Treasury bill rate in Barbados could serve as a benchmark reacting to shocks in the foreign exchange market. The Treasury bill rate could help to smooth the flow of foreign exchange through the Barbadian foreign exchange market. Seen in this light, the benchmark rate allows for a dual, but secondary anchor, in support of the primary exchange rate target. Once this interest rate is determined in the primary Treasury bill market, and not in a flexible yield secondary market, the monetary authority can minimize the domestic debt burden associated with the benchmark. Moreover, imperfectly competitive buyers of Treasury bills can purchase in bulk and still make profit at a lower interest rate, thereby reducing the debt burden.

Cuba’s reform and economic growth: a comparative perspective with Vietnam

Cuban reform process lags behind the GDP growth reached by the Vietnamese. When comparing the evolution of the different sectors and demand components of GDP, Vietnam has had higher growth rates in all cases, highlighting exports first and investment second. Once the Balance of Payments Constrained Growth model has been estimated, the significant effect of the foreign exchange constraints on growth for both countries is confirmed. However, the Vietnam growth can be explained not only by its export success. International openness, which included the end of the US embargo, and institutional factors also explains the differential of results.

Evidence of growth complementarity between agriculture and industry in developing countries

Using dynamic panel models with data for 62 developing countries, this paper examines whether growth in agriculture elicits growth in manufacturing. For identification, I use population-weighted, average temperature as an instrument for growth in agriculture, exploring exogenous variation in land yields. I find large short-run effects: a one-percentage point increase in growth in agriculture is estimated to raise growth in manufacturing by 0.47–0.56 percentage point (baseline), and 0.28–0.47 percentage point (conservative). Extensions of the empirical model suggest that growth in agriculture benefits the manufacturing sector by improving its domestic terms of trade, by increasing the share of investment and saving in GDP, and by increasing the capacity to import industrial inputs. Together, these findings lend support to the notion that agriculture plays key macroeconomic roles in the industrialization of developing countries by relieving saving, aggregate demand, fiscal, and foreign exchange constraints on the industrial sector.

Pakistan’s Growth Spurts and Reversals: A Historical Perspective

This paper takes a historical perspective to search for the major causes of Pakistan’s stop-go growth cycles and come to the conclusion that, to varying degrees, the foreign exchange constraint provides a major explanation for these cycles of irregular economic growth in the country, particularly since the 1990s.