Exchange rate fluctuations and external trade balance in Africa

The importance of understanding the consequences of currency fluctuations on trade performance for effective economic policymaking is highlighted by exchange rate volatility, persistent trade imbalances and the heavy reliance on commodity exports across Africa. The purpose of this study is to examine the effect of exchange rate fluctuations on the external trade balances of African countries, with a focus on the various responses of exports, imports and current account balances across diverse economic structures. Quarterly data for 54 countries from 2003 to 2023 are analysed using the local projections method in order to examine short-term and medium-term effects across a 12-quarter horizon, specifically in countries of the CFA franc zone, resource-intensive economies and non-resource-intensive economies. The results of this study show a complex and heterogeneous pattern in which currency depreciation generally leads to an improvement in exports,although such improvement is modest, delayed and often preceded by initial declines. Structural constraints, especially in economies that are non-resource- intensive or that are part of the CFA franc zone, weaken policy effectiveness. The findings underscore the insufficiency of exchange rate adjustments alone as a means of improving the external trade balance. Rather, an integrated strategy encompassing industrialization, trade facilitation, infrastructure development and macroeconomic stability is essential to foster resilient, diversified and trade-driven African economies.