Foreign Exchange Rate-Trade Balance Nexus in Sub-Saharan Africa

Abstract

We examine the nexus between foreign exchange rate (FER) and trade balance in Sub-Saharan Africa (SSA). We utilize balanced annual panel data for 20 SSA countries spanning 2005–2024, sourced from the World Bank. To address endogeneity, unobserved country-specific effects, and dynamic panel bias, we apply the Generalized Method of Moments (GMM) estimator. Results reveal significant persistence in trade balance, with the lagged coefficient (0.215576) indicating that about 21.6% of past trade balance conditions persist into the current period, reflecting partial adjustment and structural inertia. Crucially, FER exhibits a negative and statistically significant effect (?0.899849), implying that a 10% depreciation leads to an approximate 9% deterioration in the trade balance, ceteris paribus. This contradicts the Marshall–Lerner condition and underscores the dominance of import dependence, weak export diversification, and structural rigidities in SSA economies. We conclude that currency depreciation is counterproductive to external balance in SSA. We therefore advocate for strong and stable currencies, alongside policies promoting export diversification, domestic production, and structural transformation to achieve sustainable trade balance outcomes.