The Liberalization of Foreign Exchange Markets and Economic Growth in Sub-Saharan Africa

This paper analyses the rationale of interventions in foreign exchange markets in Sub- Saharan Africa and reviews exchange rate theory and balance of payments management and its application to African countries. It analyses the liberalization of foreign exchange markets and the impact of these markets on real exchange rates and parallel market premiums. It provides empirical estimates of the impact of real exchange rate depreciation on the current account balance and export performance. The depreciation of the real exchange rate improves the current account balance, but terms of trade movement has a larger impact on the balance of payment than it does on the, real exchange rate. The depreciation of the nominal exchange rate is, however, associated with increases in inflation. The paper argues that the appropriate exchange rate system is a crawling peg which allows adjustments in the exchange rate to take into consideration actual and expected changes in terms of trade, aid flows, external debt servicing, and productivity growth relative to trading partners.