Academic journal article Eastern Africa Social Science Research Review

Understanding the Sources of Exchange Rate Fluctuation in Sudan

Academic journal article Eastern Africa Social Science Research Review

Understanding the Sources of Exchange Rate Fluctuation in Sudan

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. INTRODUCTION

Managing competitive and stable exchange rate has been an important goal of macroeconomic policy. Indeed, since the breakdown of Breton Woods' system of fixed exchange rate regime and the starting of floating exchange rates in the early 1970s, exchange rate volatility has become remarkable phenomenon in both developing and developed countries, with a significant impact on economic growth, capital flows and foreign trade. Therefore, the sources of exchange rate volatility have gained a considerable attention from both policy makers and researchers in recent decades. Despite the extensive and diversified literature on this issue, the existing evidence is far from any consensus. Some studies attribute the variation in exchange rate to real shocks, such as, productivity shock and technology (e.g. Lastrapes (1992) and Lee and Chinn (2006)); while others believe that nominal shocks are the significant factors resulting in exchange rate volatility (e.g. Bhundia and Gottschalk (2003) and Clarida and Gali (1994)).

Over the last five decades, Sudan has adopted a number of different exchange regimes, aiming at overcoming the problems of external imbalances and unfavourable economic performance. These systems included the fixed, floating and dual exchange rate regimes. For instance, following the independence in 1956, and up to mid 1979, Sudan had followed fixed exchange rate regime. In 1979, the government shifted from fixed to flexible exchange rate system, with the support of structural adjustment programmes that were propelled by the International Monetary Fund (IMF) and the World Bank. Subsequently, as part of the economic liberalisation strategy in the early 1990s, the government has adopted the floating exchange regime. After the exploitation of oil in 1999, the exchange rate has experienced a stable trend, benefiting from the inflow of oil revenues. Recently, in response to the effect of secession of South Sudan and loss of most of the oil revenues, the Sudan government has devaluated the exchange rate by more than 100%. Given these interventions, exchange rate in Sudan has undergone remarkable volatility, which has been believed as the main reason behind the fluctuation and deterioration of the macroeconomic indicators, such as, economic growth, foreign direct investment (FDI) and foreign trade (Ebaidalla 2014). This paper aims at investigating the sources of exchange rate volatility in Sudan, using Structural Vector Autoregression model (SVAR), over the period 1979-2011.

Most of the previous studies on exchange rate (e.g. Ebaidalla 2014 and Abdalla 2009) have focused on identifying the determinants of equilibrium exchange rate and the impact of exchange rate volatility on macroeconomic performance, but not on the sources of exchange rate volatility. The present study narrows the gap in the existing literature on the sources of exchange rate volatility in Sudan. In addition, the country has witnessed many economic transformations in the recent decades owing to the exploitation of oil and substantial flow of foreign direct investment (FDI); thus, this study examines the impact of oil exploitation on the exchange rate volatility. Moreover, the study is timely and relevant in the context of the declining foreign exchange due to the loss of most of oil revenues after the secession of South Sudan. Therefore, the article provides important policy implications to guide the exchange rate policy and macroeconomic reform in Sudan.

The rest of the paper is organised as follows: The next section reviews the theoretical and empirical literature on the sources of real exchange rate fluctuations and macroeconomic performance. While section three presents the data and research methodology, section four provides empirical results. Conclusion and some policy recommendations are presented in Section five.

2. TRENDS OF EXCHANGE RATE IN SUDAN: AN OVERVIEW

Over the last fifty years, Sudan has adopted numerous exchange rate policies, including fixed, floating and dual exchange rate regimes (Ebaidalla 2014). …

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