Impact of exchange rate volatility on macroeconomic performance in Sudan

Abstract EN

This paper investigates the impact of exchange rate volatility on macroeconomic performance in Sudan, focusing on three key indicators namely, economic growth, foreign direct investment (FDI) and trade balance, during the period (1979-2009).

The study measures the volatility of real effective exchange rate (REER) using the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model.

The results reveal that REER volatility has negative and significant impact on the flow of FDI into Sudan, in the short and long-run.

This implies that volatility of REER has played a crucial role in fluctuations of FDI inflows during the last decades.

The results also point out that volatility of exchange rate has no significant impact on economic growth and current account balance.

Moreover, the results of the robustness checks of variance decomposition and impulse response function analysis confirm the findings of cointegration and error correction model.

Finally, the paper recommended that systematic currency devaluations should be avoided to mitigate the unfavorable impact on REER volatility.

Thus, policymakers need to adopt inflation targeting strategy in addition to the autonomy of the monetary policy.

Further, diversification of the economy should be considered as top priority within the development agenda.