The impact of exchange rate and exports on economic growth of South Africa

Abstract

South Africa is currently running at a very low phase of economic growth and this raised major concerns to different stakeholders in the country. A balanced exchange rate together with export promotion is viewed as the key instruments that can be used to improve the growth rate of the economy. This paper is aimed at determining the impact of exchange rate and exports on economic growth of South Africa. The Augmented Dickey-Fuller (ADF) and Phillip-Perron (PP) tests were employed to determine the unit root of the time series data. Johansen cointegration procedures and vector error correction model (VECM) were used to capture the short-run and long run relationship between the variables. The Engle-Granger causality test was also employed to determine the degree of influence amongst the variables. Furthermore, the paper carried out the impulse response function (IRF) to plot the difference between time series process without a shock and the time series with a shock. The results indicate that there is a significant positive relationship between exports and economic growth. The results further indicate that there is a significant negative relationship between exchange rate and economic growth. This implies that a depreciation of the rand in the foreign exchange market can contribute positively to the home country, because more of the domestically produced products could be sold in the international market. Measures to promote exports and balanced exchange rate are therefore recommended.