The Determinants of the Exchange Rate: A Panel Data Analysis of African Oil-Exporting Countries

Abstract

Exchange rate plays a crucial role in the international market. Its fluctuations, whether appreciation or depreciation, are strongly linked to a country’s economic performance. In African oil-exporting countries, exchange rate volatility is high due to internal and external shocks, leading to reduced trade flows, lower foreign investment, and instability in interest and inflation rates. Several studies have mostly focused on nominal exchange rates more than REER in these economies. Therefore, this research aims to investigate the common determinants of real effective exchange rate fluctuations in African oil-exporting countries, using a sample of five (5) oil-economies in Africa, namely Algeria, Egypt, Nigeria, Angola, and Gabon. The panel data regression method is employed, using annual data covering the period from 1995 to 2020 to analyse the influence of several macroeconomic variables on the real effective exchange rate of the selected countries. The empirical results obtained using the PCSE approach show the presence of a statistically significant relationship between the REER and six macroeconomic determinants, namely oil prices, foreign exchange reserves, inflation, interest lending rate, gross domestic product, and the trade balance. Specifically, oil prices, foreign exchange reserves, inflation, and lending rate have a negative relationship with the REER of the selected countries, while GDP and the trade balance have a positive relationship with the REER.