Fluctuations in Exchange Rates and Economic Growth in Oil-Exporting African Countries

Abstract

The paper analyses how exchange rate volatility affects economic growth in the oil-exporting African countries (OEACs) between the years 1980-2022 and how institutional quality and main macroeconomic control factors mediate the effects. The paper addresses a significant gap in the literature on the subject since most of the literature has been on either the developed or the developing economies without appropriately considering the dependency on commodities and vulnerability to structural shocks that the oil-exporting African nations experience. Based on the panel data obtained through the World Bank and the panel Fully Modified Least Squares (PFMLS) methodology, which implies cross-sectional dependence, unit root characteristics, and cointegration, it was learnt that the exchange rate volatility is a major impediment to the growth of the economy by creating uncertainty and deterring investments. In addition to that, poor institutional quality is observed to increase the negative impacts of exchange rate volatility on growth. The findings also suggest that money supply and exports have a positive impact on economic growth, whereas interest rates have a negative impact. However, the effect of inflation on growth in the period under consideration has no statistically significant effect. This paper finds that exchange rate volatility has been detrimental to the macroeconomic stability in OEACs, although proper and efficient policy structures can reduce these exposure risks. To this end, the paper suggests the build-up of sufficient foreign exchange reserves, the introduction of controlled and flexible exchange rate systems, the reinforcement of fiscal and monetary institutions, and diversification of exports other than oil as some of the essential measures toward the realisation of a higher level of economic resilience and sustainable development.