The Relationship Between Corruption, Inflation, Political Instability and Exchange Rate Volatility in South Africa

Purpose: This study examines the intricate relationship between corruption, political instability, inflation, and exchange rate fluctuations in South Africa. Design/Methodology/Approach: This study employs the Vector Error Correction Model (VECM) approach from 1982 to 2020. The Granger causality test was used to detect whether corruption causes exchange rate fluctuations and political instability causes fluctuations in the exchange rate. Findings: The results of the Johansen test suggest that corruption and exchange rates are related and can be combined linearly. VECM estimates show that an increase in the exchange rate will reduce corruption by a small percentage. A major finding was that while SA is said to be enjoying its democracy, inflation as of 2022 was at 5.9%, which caused corruption to increase by 100%, increasing political instability by almost 96%. The impulse response function was conducted to determine the behaviour of variables in the long run. The impulse response function findings indicate a negative reaction of exchange rates to shocks in corruption in South Africa. Practical Implications: The findings underscore the need for comprehensive policy measures to enhance transparency, accountability, and economic growth to mitigate these interrelated challenges. Effective anti-corruption measures should be prioritised to enhance exchange rate stability and promote stability. The study findings provide a nuanced understanding of how interconnected these factors are in the South African context. Originality/Value: The originality lies in highlighting the feedback loops and suggesting integrated policy approaches rather than isolated interventions. This research highlights the importance of addressing corruption to foster a more stable economy in South Africa.