Halima Jibril (University of Leeds)

Oil prices and trade balances of sub-Saharan African countries: what are the roles of exchange rates?

Abstract:  The recent oil price collapse and associated adjustment of the exchange rates of various oil exporters has heightened concerns on the effects of oil prices and exchange rates on the macro economy. The theoretical literature has shown that when oil prices change, real exchange rate adjustments help to reduce trade imbalances: they facilitate the adjustment of the nonoil trade balance in a way that offsets the effects on the oil trade balance, so that the overall trade response is limited. If this prediction holds, exchange rate management can be used to reduce exposure to oil shocks. This paper tests this prediction using bilateral trade data for 8 major Sub-Saharan African countries and their most important trading partners. The Pesaran (2006) Common Correlated Effects Mean Group (CCEMG) estimator is used. It is found that the effects of exchange rate adjustments depend on the initial oil price impact. Specifically, depreciations will reduce imbalances after an adverse oil shock, but appreciations will reinforce imbalances after a favourable oil shock. This points to a greater price elasticity of demand for traded goods following adverse oil shocks, and implies that, in these situations, a devaluation is a viable policy option.