IS CURRENCY DEVALUATION APPROPRIATE FOR EXPORT PERFORMANCE AND ECONOMIC GROWTH IN THE WAMZ COUNTRIES


BY

 

ABWAKU ENGLAMA

MOMODOU SISSOHO

OLUKAYODE S. ODENIRAN

 OZOLINA HAFFNER

 

WEST AFRICAN MONETARY INSTITUTE

GULF HOUSE, TETTEH QUARSHIE INTERCHANGE

PMB CT 75, ACCRA, GHANA

Abstract

Following a relatively stable macroeconomic environment between 2006 and 2013, the WAMZ countries are now experiencing rising imbalances in their macroeconomic sectors. Of significant importance is the external sector in which the balance of payment account has been deteriorating mainly due to slump in primary commodity prices from mid-2014. In addition, global monetary policy has been less supportive, with tight monetary conditions in key advanced economies fueling capital flight from emerging and developing economies. As a result, rising trade imbalances are driving fiscal imbalances with concomitant increase in public debt and interest rates The cumulative effect of these developments in the WAMZ countries is slowing economic growth with elevated unemployment and poverty rates.

Some academics and policymakers in the WAMZ economies are beginning to advocate for devaluation as a policy option for stimulating export performance and invariably restore these economies on sustainable growth path.   The theoretical underpinnings of this view rest on the age long orthodoxy that devaluation could improve external sector performance because a weakened currency would boost exports, while simultaneously reducing import demand. The other side of the argument however is that performance of merchandise exports is a critical function of elasticity of demand for these exports which is a major shortcoming to most emerging and developing economy exports. In addition, there is the burden of foreign debt, especially debt service repayments which could also widen the current account gap.

In the light of this, the key question is could devaluation of currencies be used to stimulate export and invariably growth in the WAMZ countries? This study seeks to provide insight into this issue by employing both qualitative and econometric tools to analyze the relationship between currency devaluation, export performance and economic growth in the WAMZ countries.

The qualitative analysis would involve trend analysis on performance of nominal as well as real effective exchange rate, export of merchandise and output in the six WAMZ countries. Econometrics tools to be used would include Engel granger causality and error correction models (ECM) which would examine the impact of movements in exchange rates on export of merchandize trade and growth in these countries. The findings would inform policy at this critical period in the various WAMZ countries. 


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