Analysis of the determinants of foreign exchange reserves in sub-Saharan Africa
Date
2022
Authors
Thabana, Gaone
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Abstract
Abundant literature has risen sharply over the years with regards to determinants of foreign exchange reserves and motives for holding the foreign exchange reserves due to the financial and currency crises that the world has experienced. This study examines the determinants of foreign exchange reserves using 19 Sub-Saharan Africa countries over the period 2000-2019 and applies the panel autoregressive distributed lag methodology. The empirical discussion is enriched by extending the Worrell (1976) framework of optimal foreign exchange reserves considering the role of the institutions and its effect on the flow of foreign exchange reserves across the selected countries. Results from the empirical analysis indicate that the main determinants of foreign exchange reserves in Sub-Saharan Africa are trade openness, broad money to GDP, inflation and exchange rate. With regards to the role of institutions, political stability and absence of terrorism, government effectiveness, control of corruption and voice and accountability affect reserves in the long run, while control of corruption and regulatory quality negatively affect reserves in the short run. Countries should therefore observe the above-mentioned macroeconomic indicators and quality of their institutions to increase their reserves and for the development of their economies.
Description
A research report submitted in partial fulfilment of the Degree of Master of Commerce in Economics to the Faculty of Commerce, Law and Management, School of Economics and Finance, University of the Witwatersrand, Johannesburg, 2022