Alternative Exchange Rate Strategies and Fiscal Performance in Sub-Saharan Africa
IMF Working Papers, August 1, 1993
Source details
- Canonical URL
- Alternative Exchange Rate Strategies and Fiscal Performance in Sub-Saharan Africa
Other formats
Bibliographic details
- Authors: Stefania Bazzoni, Karim A. Nashashibi
- Published: August 1, 1993
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451961058.001
Summary and main findings
- Study period: 1980-91; sample: 28 sub-Saharan African countries.
- Primary finding: The tax base in most sampled countries is heavily dependent on imports and import substitutes.
- Fixed exchange rate strategy:
- Overvaluation of the exchange rate undermines the tax base.
- When the purpose of the strategy is to restore the real exchange rate to its equilibrium through fiscal contraction, fiscal deficits widen.
- Variable exchange rate strategy:
- Countries pursuing a variable exchange rate strategy failed in attaining price stability.
- Exchange rate adjustment was critical in contributing to other macroeconomic objectives, particularly fiscal balance, competitiveness, and growth.
Data, scope, and methodology
- Geographic focus: Sub-Saharan Africa (28 countries).
- Time coverage: 1980-91.
- Macroeconomic variables examined: exchange rates, terms of trade, and other macroeconomic aggregates.
- Emphasis on relationships between exchange rate strategy (fixed versus variable) and fiscal performance through effects on tax base tied to imports and import substitutes.
Policy implications and interpretation
- Exchange rate policy choice has trade-offs:
- Fixed regimes that lead to overvaluation can erode import-dependent tax bases and worsen fiscal deficits when fiscal contraction is used to restore equilibrium.
- Flexible regimes may compromise price stability but enable exchange rate adjustments that support fiscal balance, competitiveness, and growth.
- Fiscal policy design should account for the composition of the tax base, especially reliance on imports and import substitutes, when selecting exchange rate strategies.
Subject matter and keywords
- Subjects: Expenditure, Foreign exchange, Imports, International trade, Real exchange rates, Revenue administration, Terms of trade.
- Keywords: Africa, CFA franc, FER, FER country, FER sample, GDP deflator, GDP ratio, import substitute, import unit value, Imports, income effect, nominal exchange rate, payment arrears, per capita income, Real exchange rates, Sub-Saharan Africa, Terms of trade, VER, West Africa, WP.