- 24-

announced, it was fairly transparent to bidders, so that despite the higher supply volatility in Ghana and Uganda relative to the other two countries, the exchange rate prescribed a fairly stable path. An alternative explanation is that bidders were risk neutral in these auctions. This result may apply for Zambia (where no binding reserve price was used), and accords with the conclusions above on revenue equivalence. On the contrary, for Nigeria, supply volatility was too litnited to have the expected effect because foreign exchange supply was used as target variable to stabilise the exchange rate (without success). However, these results should not be taken to imply that supply volatility did not matter in these auctions: in preliminary regressions (not reported here) we found supply volatility to be an important determinant of exchange rate volatility. This would be a useful area for further research, with the implication that foreign aid may ameliorate supply volatility induced by temporary terms of trade shocks.

The role of competitiveness effects in auctions could only be tested for Nigeria. Our results show that controlling for policy intervention and consequent structural shifts which characterised the Nigerian auction, an increased number of bidders lead to equilibrium auction rate depreciation in repeated, multiunit auctions. This prediction from auction theory for more restricted auctions, has been found to hold in other types of one-shot, multi-unit auctions (McAffee and McMillan, 1987). However, this is the first corroboration of the theory for a repeated, multi-unit auction.

# **_5.2 Poicy_** lessons.

In broad. summary, these empirical results corroborate the distinction between two sets of countries in terms of design features, auction policies and outcomes.<sup>4</sup> Ghana and Uganda represent a set where auctions have been largely on target in terms of the ree policy objectives of exchange rate unification, stabilisation of the exchange rate and an efficient allocation of foreign exchange. On the other hand, the auctions in Zambia and Nigeria were subject to frequent policy interventions, with the consequence of unsustainable auctions, inefficient allocation through ad hoc disqualifications (at least in Zambia), limited unification, and a rather volatile exchange rate. A number of policy lessons for exchange rate reform in SSA can be distilled from these results.

First, in large measure, the failure to achieve exchange rate unification and a stable exchange rate in Zambia and Nigeria can be attributed to the absence of a reserve price rule. Our results suggest that use of a fairly predictable reserve price stabilises foreign exchange auctions, given the limited depth of SSA financial markets. The rule is learned by bidders, and diminishes speculative bidding." a Furherm **o** the re, disftibutional analysis in acompanionpaper (Aron and Elbadawi, 1994) also ueda clear distinction **between the** two **sets** of countries. For example, the distribution of the auction rate exhibits **left** skewness (tendency towards appreciadon) in Nigeria and **Zambia- while** the opposite **was** observed **for** Ghana and Uganda.

**"In** principle, a pre-announced and stable supply policy rule could achieve a similar **stbilising** effecL However, we have shown that in practice **the endemic** potential variability of **foreign** exchange **earnings** (excluding **aid)** in SSA, makes it **difficult** for an auctioneer to guarantee **credibly** a stable supply **in** the medium-run. **Furiernore.** a supply rule **does** not **achieve** the **close**