Empirical studies on exchange rate pass-through, access to foreign currency and firm performance

  • Muhammed Siraj MUHAMMED

Student thesis: PhD Thesis (Lingnan)

Abstract

This dissertation consists of two parts and each part contains two empirical studies that rely on macroeconomics, monetary policy, and international trade. The first part addresses the issue of exchange rate pass-through to domestic price developments with a focus on the Sub-Saharan Africa (SSA) countries, while the second part explores constraints of manufacturing firms in Ethiopia and examines the impact of access to foreign currency on firm performance.

In the first chapter, I presented an overview of the study. In the second chapter, I examined to which extent the exchange rate fluctuations transmitted into domestic inflation (ERPT) using a large set of sample countries from three different economies (i.e. Industrial (16), Emerging (16) and Sub-Saharan Africa (16)) over 1990-2018. Using the augmented bi-variate and Structural Vector Autoregression (SVAR) methods, the study finds that the degree of ERPT to consumer price is incomplete, varies across sample countries and it declines over time. Specifically, the SSA sample countries have been found with a high degree and variation of ERPT compared to other groups of sample countries.

In the third chapter, I investigated whether the macroeconomic factors contribute to cross-country differences in ERPT using the weighted least square method (WLS). And, the result shows that a greater extent of ERPT strongly connected with a higher inflation environment, more exchange rate volatility, less transparent central banks, and less foreign currency reserve while little evidence is detected from trade openness and central bank independence, particularly for the SSA sample countries.

In the fourth chapter, I explored the major production constraints of manufacturing firms in Ethiopia. To this end, I collected a primary data of 100 importing and exporting firms from five regions in Ethiopia. The finding revealed that the shortage of foreign currency is a key production barrier of manufacturing firms in Ethiopia by creating a shortage of essential foreign inputs to their production operation. Additionally, the shortage of power and water supply, and lack of working capital are also the major constraints of firm productivity.

In the final chapter, I further examined the effect of access to foreign currency on firm production performance using a 21-years comprehensive census-based firm-level data obtained from the official Ethiopian Central Statistical Agency (ECSA). To this end, I constructed a proxy measure of ‘access to foreign currency’ by the ratio of parallel to official exchange rates to confront firms' production performance. The study finds a negative and statistically significant effect of ‘lack of access to foreign currency’ on firms’ production performance, especially for importing firms that do not export. The result suggests that a shortage of foreign currency shrinks firms' ability to strengthening and expanding their production capacity, which has made them less competitive in both local and international markets. As a result, the contribution of manufacturing firms to the country’s economy in terms of employment creation, foreign currency earning, and skill transferring is still minimal.

Date of Award15 Sep 2020
Original languageEnglish
Awarding Institution
  • Lingnan University
SupervisorMatthieu Daniel CROZET (Supervisor) & Chi Leung Adam WONG (Supervisor)

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