The Effect of Exchange Rate Shocks on Economic Growth in the Common Monetary Area in Southern Africa

Abstract

The Common Monetary Area (CMA) presents an interesting case study because its economies employ two types of exchange rates: flexible (as in South Africa) and fixed (as in Lesotho, Eswatini, and Namibia). South Africa’s flexible rate is plagued by an unstable exchange rate, which affects other CMA member countries and significantly impacts economic growth. Therefore, this study explores the asymmetric effects of exchange rate shocks on economic growth by employing the panel non-linear autoregressive distributed lag (PNARDL) technique. The research utilizes panel annual data ranging from 1992 to 2022. The PNARDL estimates reveal that both negative and positive changes in the exchange rate significantly impede economic growth in the CMA in both the short and long run. Moreover, it is noted that there is an asymmetric impact of the exchange rate in the long run. The implication of this study is that the significant impact of exchange rate asymmetry is notable in the CMA region. This study suggests that policymakers should implement policies that actively support exports, such as offering export incentives or reducing trade barriers. The findings of the research also reveal that appreciation hurts economic growth. Therefore, this study further recommends that policymakers may explore enacting policies to expand the economy by reducing import dependence and addressing structural factors that impede export competitiveness.