Exchange Rate Policy and Trade Facilitation in Regional Integration Agreements: The Case of Southern African Economies

The major objective of this study is to evaluate the role of exchange rate policy in determining trade flows with respect to Southern African economies. The study provides a structural analysis to the empirical strength of the influence of exchange rate movements on trade flows for small low-income countries on the basis of the prevalence of export demand pessimism, import demand pessimism and export supply pessimism. Through an empirical estimation of real exchange rate and output elasticities of import and exports of eight SADC economies, namely Zimbabwe, Zambia, Botswana, Malawi, Lesotho, Swaziland, South Africa, Mauritius, the main findings of the study indicate that exchange rate policy has not played an active role as a trade facilitation tool in regional economies. Moreover, the tendency of the pervasive effects of distorted macroeconomic and structural macroeconomic fundamentals is reflected in some inconsistent results as well as the statistical insignificance of some of the elasticities.

Overall, the analysis shows that output elasticities are generally large and well-determined. By contrast, the real exchange rate elasticities are less-well determined and generally quite low. Hence although there is considerable evidence that the real exchange rates do affect trade volumes in the expected directions, the results are in most cases quite pessimistic as regards the size and effectiveness of the underlying elasticities. Thus the main conclusions of the study point towards the general overview that trade and exchange rate policy implementation in regional economies is highly constrained by the underlying structural features of the economies which make import substitution difficult while exhibiting inelastic export response both on the demand and supply side.

High degrees of import compression, excessive dependence on a few traditional export products while importing manufactured goods and machinery that are critical inputs in the production process has perpetuated the low responsiveness of imports and exports to changes in the real exchange rates in SADC economies. Thus in light of the findings, sustained exchange rate policy implementation which hinges on extensive institutional and technological capacity as well as maintaining comprehensive coherent macroeconomic packages remains a critical factor in ensuring that exchange rate policy performs its central role as a trade facilitation tool.