SEMESTER: SUMMER 2019

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TASK: ARTICLE REVIEW

AUTHOR: BERNARDIN SENADZA & DESMOND DELALI DIABA

TITLE: “Effect of exchange rate volatility on trade in Sub-Saharan Africa”

10TH JULY 2019

Summary

The authors Bernardin and Desmond initiates their article by describing how the end of the fixed
value system and the implementation of governments where, the currency price of a state is set by
the foreign market based on supply and demand comparative to other currencies (floating regimes)
has resulted to volatile fluctuations in bilateral exchange rates which in turn is averting success in
global trade.

To elaborate their study, the authors provides a theoretical framework where they review the
traditional school of thought and the risk-portfolio view. According to the traditional school pf
thought, the upsurge of dangers associated with cross-border exchanges, variances in exchange
rates may decrease the volume of global trade as dealers move from high-risk trading compulsions
to low-risk ones. On the contrary, the risk-portfolio view asserts that advanced risks results to
higher returns and increasing trade due to changing exchange rates which could rather increase the
volume of trade.

The authors introduces their case study, the Sub-saharan Africa and reviews how their efforts to
fix the exchange rates led to serious balance of payments due to administrative controls on foreign
exchange allocation by foreign exchange states, current account transactions, widespread foreign
exchange rationing due to obstinately weak external accounts , large black market premiums and
stagnating per capital real incomes. This led them to liberalize their economies that led to upsurge
in exchange rate fluctuations.

The authors then provide a literature review that is divided into four parts. The first part argues
that volatility in exchange rate has harmful effects on trade flows with the hypothesis of risk
aversion, hence, the trade response in the face of exchange rate unpredictability is negative. The
second part argues that there is a positive association between exchange rate volatility and trade
because, in the face of growing exchange rate volatility, firms will quickly enter the market to
exploit the anticipated benefits and exit later. The third part offers an equivocal review where the
authors argue that the relationship can either be positive or negative. To summarize on the
literature, the authors review a global study by IMF where the effect of volatility on trade was
found to be unconvincingly negative.
Finally, the authors carried out an econometric research on eleven Sub-saharan African economies
and uncovered that, there was no substantial impacts of exchange rate volatility on imports. In the
case of exports, nevertheless, the study found a negative consequence of volatility in the short-run,
consistent with the above view, but a positive effect in the long-run.

REVIEW

The title of the article, “Effect of exchange rate volatility on trade in Sub-Saharan Africa”, is
suitable and unambiguous. The authors maintain focus of the title throughout the article and begins
by making a factual statement. In their writing, they examine the effects of exchange rate volatility
on trade (exports and imports) in the SSA region. They delve into the initial stage when the Bretton
Woods monetary system came to an end and this brought about the fixed value system. This forms
the basis of analysis of the fixed value system in Sub-Saharan Africa and how it has affected trade
in the region.

The authors have done justice to their work by highlighting the work of other authors on the
subject. Their assertion can therefore be subjected to more scrutiny. In addition, they make use of
several outstanding authors hence, making their paper credible and researchable. Based on the
format an style, that authors made use of a very simple diction and writing style which made it
easy to keep his readers’ interest, while understanding and being able to follow the consistency of
his arguments.

The authors made use of the views from the traditional school of thought and the risk portfolio
view which provides a conceptual framework on which their work can be analyzed and criticized.
This is ably demonstrated by the authors conclusions that the reasons of the fluctuating exchange
rate in Sub-Saharan Africa is macroeconomic shocks. This can be argued as a conclusion without
concrete evidence.

In a nutshell, the writing of Bernardin and Desmond is trying to explain how the adaptation of
regimes whereby the currency price of a nation is set by the forex market based on supply and
demand relative to other currencies, has led to volatile variations in bilateral exchange rates leading
to adverse impacts on global trade. This article is well done and is praiseworthy for the precision
to which the authors constructs their study and lays a powerful case for more research and
investigations on the subject.