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Foreign aid, debt interest repayments and Dutch disease effects in a real exchange rate model for African countries

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posted on 2023-07-25, 16:06 authored by Ahmad Hassan AhmadAhmad Hassan Ahmad, Eric PentecostEric Pentecost, Marie Stack

The international competitiveness of developing countries is integral to their economic development, hence understanding the main determinants of the real exchange rate is important. The empirical literature supports the Dutch disease hypothesis that foreign aid inflows significantly contribute to a real appreciation of African currencies, but these studies do not account for the downward pressure on the exchange rate from foreign currency payments. Using a panel of sub-Saharan African countries from 1980 to 2017, we test the hypothesis that the real exchange rate appreciation from aid inflows is moderated by interest repayments on external debt. Our findings suggest that one-third of the Dutch disease effect of aid inflows on the real exchange rate is offset by external debt interest repayments. These findings are important in showing that countries with external debt servicing obligations can mitigate the Dutch disease effect of aid inflows on competitiveness.

History

School

  • Loughborough Business School

Department

  • Economics

Published in

Economic Modelling

Volume

126

Publisher

Elsevier

Version

  • VoR (Version of Record)

Rights holder

© The Authors

Publisher statement

This is an Open Access Article. It is published by Elsevier under the Creative Commons Attribution 4.0 International Licence (CC BY). Full details of this licence are available at: https://creativecommons.org/licenses/by/4.0/

Acceptance date

2023-07-04

Publication date

2023-07-05

Copyright date

2023

ISSN

0264-9993

eISSN

1873-6122

Language

  • en

Depositor

Dr Ahmad Hassan Ahmad. Deposit date: 5 July 2023

Article number

106434

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