U.i.POLICY RESEARCH WORKING **PAPER** 1311

# Summary findings

In the diversity of exchange-rate regimes in Sub-Saharan Africa in the I980s, there was a trend coward morc flexible resimes and smaller parallel markets. How particular exchange rate arrangements affect such factors as output supply cannot be dctermined for Sub-Saharan African countries on the basis of experience in other developing countries, because Sub-Saharan countries differ in the composition of their exports and imports, in level of industrialization, and in development of the financial sector.

Rouis, Razzak, and Mollinedo supplement a survey of the literature witih empirical testing, using pooled timescries and cross-section data for 22 countries in SubSaharan Africa for 1971-91. Among their findings:

* When macroeconomic policies are inconsistent and there is a failure to adjust to adverse shocks, fixed regimes lead to overvaluation and rhe developmenr of widespread parallel markets for foreign exchange.

- * Sub-Saharan African countries have attempted exchange-rare unification through occasional devaluations, a crawling peg, official dual markets, foreign exchange auctions, and a market pricing rule. Most such experiernces have bcen gradual, and their outcomes mixed. Success in exchange-rate unification (as experience in Ghana and Uganda shows) depends on three crucial elements: supportive monetary and fiscal

policy, external budgetary and balance-of-payments support, and official commitment ro a credible reform processIn the face of significant adverse real shocks (internal and external), built-in monetary and fiscal rules in fixed exchange rate regimes with currency convertibility (as in the CFA zone) may bh inadequate to bring about the required shorr-term adjusrmenr.

> * As elsewhere in the developing world, the effect of real devaluation on output in Sub-Saharan Africa is mixed in the short-run (contractionary when demand elasticities are low) and ncutral in the long-run. Real depreciations have neutral effects on per capira growth of real output in the transition to steady state..

> * Farm producers in Sub-Saharan Africa respond to price incentives for a single agricultural crop as farmers do elsewhere in the developing world- **hey** tbehave rationally. And econometric evidenoe confirms that growth in agricuirural exports is nor achieved at the expense of food production.

- Applying the Granger-causality test to this data set reveals strong causality, running in both directions, between money growth rates and inflation. It also shows causality running from output to inflation, and from inflation to nominal devaluations.

This paper-a product of the Africa Regional Office, Office of the Chief Economist- is part of a larger effort in the department region to bettcr understand rhe supply rcsponse to cxchange rate rcform in Sub-Saharan Africa. Copics of the paper are available free from the World Bank, 1818 H StrcerNW, Washington, DC 20433. Please conractJocelyn Schwartz, room JS-255, extension _32250 (85_ pages). June 1994.

> _The Policy Research Working Paper Series disseminates the findings of_ **_uork_** _in progress to encourage tbe exchange of ideas about development issues. An objectiveofthesries is toget the findings out quickly, even if the presentations are less than filly polished The papers carry the names of the authors and shosld be usedand cited accordingly. ne fmdings, interpretations, and condusions are the_

> _authors own andshould not hbeatributd to the World Bank it Fxeci Board of Dfrcaors or any of its member countries_

## Prodiuced by the PoLicy Research Dissemination Center