Remittances, Exchange Rates and Dutch Disease in Sub-Saharan Africa

Abstract

This study empirically investigated the short run and long run effects of remittances on real exchange rate. Further, it examined the impact of remittances on resource movement from tradable to non-tradable sector in the CFA franc and non-CFA zones of sub-Saharan Africa (SSA). A panel based, Pooled Mean Group estimation technique was adopted to estimate the data collected from 1981 to 2018 for 26 SSA countries which comprises 15 non-CFA and 11 CFA countries. Both aggregate (SSA) and disaggregated (CFA franc and non-CFA) analyses were conducted. The data utilized were collected from the World Bank’s World Development Indicator and International Monetary Fund’s International Financial Statistics data base. Evidence from the results indicated that remittances inflow led to real exchange rate appreciation in the CFA zone. However, the effect of remittances on real exchange rate in the non-CFA zone is not statistically significant. Further, while remittances caused shift of resources from tradable to non-tradable sector in CFA zone in the long run; there is no significant evidence that remittances would lead to resource movement from tradable to non-tradable sector in the non-CFA zone. Thus, in the CFA zone, effective policies need to be implemented to channel remittances towards investment in agriculture and industry (tradable sector) in order to reduce the negative impact of remittances in the sector.