Commodity prices and exchange rates in Southern African countries

Abstract

This study empirically assesses the relationship between exchange rates movements with non-fuel commodity prices indices of five Southern African countries, namely; Botswana, Malawi, Mozambique, South Africa, and Zambia. Monthly International Monetary Fund (IMF) non-fuel commodity price indices (NFCI) and monthly exchange rates (expressed USD per unit of the local currencies) that span January 1996 to September 2018 were used for this study. The econometric techniques employed were EG two-stage and Johansen Trace cointegration tests, VAR(1) models, and Granger causality tests. The cointegration tests reveal no long-run relationship between commodity price index and exchange rates for all of the selected countries, which implies that in the long term there is equilibrium link between these two variables of interest for neither Botswana, Malawi, Mozambique, South Africa, nor Zambia. The study fails to reject that there is no Granger causality between the commodity price index and exchange rates in both directions for Botswana, Malawi, and Mozambique. At the 10% significance level commodity price index Granger cause exchange rates and exchange rates Granger cause commodity price index for South Africa; Zambia has only a uni-directional Granger causality from exchange rates to commodity price index. Thus, the interdependence between these two variables is not complete but partial. It is recommended that, for further studies, an endeavor be made to find the possible exogenous variables that serve as the determinants of commodity prices and exchange rates.