Final Submitted Thesis - Mbongeni Welcome Shongwe Trial 1

THE EFFECTS OF AGRICULTURAL EXPORTS ON FOREIGN EXCHANGE
RESERVES OF ESWATINI
December 2021
MBONGENI WELCOME SHONGWE

THE EFFECTS OF AGRICULTURAL EXPORTS ON FOREIGN EXCHANGE
RESERVES OF ESWATINI
By
MBONGENI WELCOME SHONGWE (B.A. Soc. Scie)
A Thesis Submitted in Partial Fulfilment of the Requirements
for the Degree of MASTER OF SCIENCE
in
Agricultural and
Applied Economics
of the
University of Eswatini
December, 2021
Dr. S.G. Dlamini, Supervisor Prof. A, Belete External Examiner
Dr. D.V. Dlamini, Co-supervisor

COPYRIGHT
Permission has been granted to the Library of the Luyengo Campus of the University of
Eswatini to lend copies of this Thesis report.
The author reserves other publication rights and neither the Master ‘s Thesis nor
extension extracts from it may be printed or reproduced without the author ‘s written
permission.
Copyright © Mbongeni Shongwe, 2021
i
DECLARATION
I Mbongeni Welcome Shongwe declare that the thesis, which I hereby submit for the
degree MSc in Agricultural and Applied Economics at the University of Eswatini, is my
work and has not previously been submitted by me for a degree at this or any other
tertiary institution.
SIGNATURE: M.W Shongwe

Date: August 2021
ii
THE EFFECTS OF AGRICULTURAL EXPORTS ON FOREIGN
EXCHANGE RESERVES OF ESWATINI
ABSTRACT
Eswatini has insufficient foreign exchange reserves to sustain the CMA currency peg.
This study attempts to explore the effects of agricultural exports on the foreign
exchange reserves of Eswatini. The main objective of the study was to examine the
relationship between of Eswatini agricultural exports and foreign exchange reserves.
Attempts were made to provide a theoretical justification for using the autoregressive
distributed lag model in the analysis of the relationship between the Eswatini’s
agricultural exports and foreign exchange reserves. Time series data for the period
1990- 2020 was analysed using the autoregressive distributed lag model. The findings
of the study showed that there is a positive relationship between foreign exchange
reserves and agricultural exports. Other variables which were found to have a
positive long run relationship with foreign exchange reserves include exchange rates,
money supply to GDP, SACU receipts and net foreign assets reserves. Based on the
existence of this positive relationships the study therefore recommended that the
government should continue to support farmers to stimulate agriculture production
and hence improve agricultural exports. The government should also promote intra-
SACU trade to increase SACU receipts. The study further recommends that the
Central bank of Eswatini should use money supply instruments to increase foreign
exchange reserves. Lastly Eswatini should also increase its foreign assets in order to
improve the country reserve position. It is also recommended that future research
should focus on finding a causal relationship between agricultural exports and
economic growth in Eswatini
Key words: Agricultural exports, Foreign Exchange

Reserves, Money Supply, Net Foreign Assets , Time series
data.
iii
DEDICATION
First and foremost, this project is dedicated to the Almighty God, who has granted
me the grace to do this thesis from the beginning up until now. To the author ‘s
friends and the entire Shongwe family who provided the author with financial,
spiritual and emotional support throughout his educational career. Thank for your
love and prayers this has not been an easy journey.
Special dedication is also accorded to the author ‘s loving wife, Mrs T. Shongwe and
the author’s son Awandze Shongwe who gave him a better reason to work hard even
at his lowest point.
vi
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ACKNOWLEDGEMENTS
The author wishes to extend his sincere gratitude to all those made the completion of this
thesis a success.
Firstly, my sincere gratitude goes to the author’s main supervisor Dr. S.G.
Dlamini, who provided his expertise to guide the author as he wrote his thesis, words are not
enough to describe how grateful the author is. His lectures on econometrics also equipped the
author with the necessary skills to conduct the required scientific tests in this thesis to ensure
that it is up to the expected standard. Secondly the author would like to thank his co-
supervisor Dr. D.V. Dlamini, who provided guidance on important policy aspects to include
in order to improve the study. The instructions on agriculture policy came in handy and
added value to the main script.
Finally, the author wishes to express his sincere gratitude to the Agricultural
Economics and Management Department who provided constructive comments to the author
from the proposal stage up to the completion stage of the thesis. Such comments were of
paramount importance in helping the author to improve his study. They are greatly
appreciated, and their expertise contributed to the success of the study.
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TABLE OF CONTENTS
CONTENTS
COPYRIGHT ........................................................................................................................... I
DECLARATION..................................................................................................................... II
ABSTRACT ........................................................................................................................... III
DEDICATION....................................................................................................................... IV
ACKNOWLEDGEMENTS ................................................................................................... V
TABLE OF CONTENTS ..................................................................................................... VI
CONTENTS........................................................................................................................... VI
LIST OF TABLES OF AND FIGURES .......................................................................... VIII
ABBREVIATIONS ............................................................................................................... IX
CHAPTER 1 - INTRODUCTION .......................................................................................... 1
1.1. Background and Setting .............................................................................................. 1

1.1.1 Reserves to Import Ratio (Import Cover) ........................................................... 10
1.2. Problem Statement .................................................................................................... 10
1.3. Objectives of the Study ............................................................................................. 11
1.4. Hypothesis ................................................................................................................. 11
1.5. Significance of the Study .......................................................................................... 11
1.6. Limitations of the study............................................................................................. 12
1.7. Definition of Terms ................................................................................................... 12
1.8. Chapter Summary...................................................................................................... 12
CHAPTER 2 - LITERATURE REVIEW ........................................................................... 13
2.1. Theoretical Literature ................................................................................................ 13

2.1.1. Overview on trade theories ................................................................................. 13
2.2. Empirical Literature .................................................................................................. 20
2.3. Methodological Literature Review............................................................................ 22
2.4. Summary of the Literature Review ........................................................................... 25
CHAPTER 3 - METHODOLOGY....................................................................................... 27
3.1. Introduction ............................................................................................................... 27
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3.2. Data Sources .............................................................................................................. 27
3.3. Data Analysis ............................................................................................................ 28
3.3.1. Descriptive statistics of the variables ................................................................. 28
3.3.2. Trend of Eswatini’s Foreign Exchange Reserves and its determinants for the
period 1990-2020 ................................................................................................ 28
3.3.3. The elasticity of Eswatini’s Agricultural Exports and its determinants. ............ 28
3.4. Chapter Summary...................................................................................................... 31
CHAPTER 4 - DISCUSSION OF RESULTS ..................................................................... 32
4.1. Descriptive Statistics ................................................................................................. 32

4.2. Trend of the determinants of Eswatini’s Agricultural Exports and its predictor
variables. .............................................................................................................................. 33
4.2.1. Eswatini’s Foreign Exchange Reserves .............................................................. 33
4.2.2. Eswatini’s Agricultural Exports ......................................................................... 33
4.2.3. SACU Receipts Trend for the past 31 Years ...................................................... 34
4.2.4. Exchange Rates................................................................................................... 34
4.2.5. GDP per Capita ................................................................................................... 35
4.2.6. External Debt to GDP ......................................................................................... 35
4.2.7. Money Supply to GDP ....................................................................................... 36
4.2.8. Net Foreign Assets.............................................................................................. 37
4.3. The elasticity of Eswatini’s foreign exchange reserves and its predictor variables .. 37
4.3.1. Stationarity Test Results ..................................................................................... 37
4.3.2. Cointegration Test .............................................................................................. 39
4.3.3. Short-run ARDL Results .................................................................................... 39
4.3.4. Long-run ARDL Results .................................................................................... 40
4.3.5. Granger causality test ......................................................................................... 41
4.3.6. Model Stability Tests .......................................................................................... 42
CHAPTER 5 - SUMMARY, CONCLUSION AND RECOMMENDATIONS................ 44
5.1. Summary of findings ................................................................................................. 44

5.2. Conclusions ............................................................................................................... 45
5.3. Recommendations ..................................................................................................... 45
5.4. Recommendations for further study .......................................................................... 47
REFERENCES ....................................................................................................................... 48
APPENDIX ............................................................................................................................. 54
vii
LIST OF TABLES OF AND FIGURES
Figure 1.1 The of Exports and Imports in the past 11 years .................................................. 6
Figure 1.2 Eswatini Trade Openness for the period 1990-2020 ............................................ 6
Figure 1.3 Eswatini Export Import Ratio for the period 2010-2020 ...................................... 7
Figure 1.4 Exports, Imports and Trade Balance Overview .................................................... 7
Figure 1.5 Quarterly Overview of Foreign Exchange Reserves ............................................ 9
Figure 4.1 Trend for Foreign Exchange Reserves for the period 1990-2020 ...................... 33
Figure 4.2 Trend for Agricultural Exports for the period 1990-2020 .................................. 34
Figure 4.3 Trend for SACU Receipts for the period 1990-2020 ......................................... 34
Figure 4.4 Exchange Rates for the period 1990-2020 ......................................................... 35
Figure 4.5 Trend GDP per CAPITA for the period 1990-2020 ........................................... 35
Figure 4.6 Trend for External Debt to GDP for the period 1990-2020................................ 36
Figure 4.7 Trend for Money Supply to GDP for the period 1990-2020 .............................. 36
Figure 4.8 Trend for Net Foreign Assets for the period 1990-2020 .................................... 37
Figure 4.9 Cumulative Residuals ......................................................................................... 43
Figure 4.10 Cusum Squared Residuals ................................................................................... 43
Table 1:1 Quarterly Exports Growth Rates of Eswatini ...................................................... 3

Table 1:2 Quarterly Imports Growth Rates of Eswatini ...................................................... 4
Table 1:3 Eswatini Imports and Exports by Partner ............................................................ 5
Table 2:1 Empirical Determinants of Foreign Exchange Reserves ................................... 23
Table 4:1 Descriptive Statistics .......................................................................................... 32
Table 4:2 Stationarity Test Results: Augmented Dickey-Fuller ........................................ 38
Table 4:3 Stationarity Test Results: Philips Peron Test ..................................................... 38
Table 4:4 ARDL Bounds Test for Cointegration ............................................................... 39
Table 4:5 Model Results: Short-Run Error Correction Model Coefficients Results ......... 40
Table 4:6 ARDL Model Results: Long-Run Coefficients Results..................................... 41
Table 4:7 Granger causality test Results ............................................................................ 42
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ABBREVIATIONS
CBE Central Bank of Eswatini

CMA Common Monetary Area
EU European Union
GDP Gross Domestic Product
IMF International Monetary Fund
SACU Southern African Customs Union
SRA Eswatini Revenue Authority
SADC Southern African Development Community
REER Real effective exchange rate

RGDP Real Gross Domestic Product
TDCA Trade, Development and Cooperation Agreement
USA United States of America

WDI World Development Indicators
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CHAPTER 1
INTRODUCTION
1.1. Background and Setting
Countries use different amount of resources to produce goods depending on the

availability of those resources. They also use different technologies to produce these
goods and services (Allaro, 2015). These differences in the amount of resources lead to
differences in the price of the factors of production which then results to different prices
across countries. This supports economic theory which states that the differences in the
prices of goods and services is the main reason why countries engage in trade (Smith,
1976). According to Narayan (2019) foreign trade improves the allocation of resources
and also increases world production and consumer welfare. For instance, according to a
study by Cheffo (2020), a lot of Asian countries recorded a significant increase in exports
through specialising in highly productive agricultural exports at the initial stage of
economic development, then focused on the labour-intensive products and lastly on highly
capital-intensive export products since they have advanced technology compared to
developing countries.
According to World Bank (2016) the share of developed countries increased by 25% to
33%, however despite that Africa’s average share of international trade is relatively low
and was recorded to be 3%. According to Eswatini Revenue Authority Database (2020)
the export market penetration for Eswatini was 2.3% and the HH Market concentration
index was 0.4 %, this means that the exports of Eswatini are more concentrated and less
diverse.
Eswatini government has some policies to improve the production of agricultural products
and these include subsidising rural farmers with farming inputs such as; seeds, fertilizers,
providing machinery to farmers such as tractors. These policies intend to improve
agricultural exports since farmers in rural areas are encouraged to sell their produce to
NAMBOARD which then sells the crops and vegetables to international markets. The
Ministry of agriculture also provides veterinary services to livestock farmers in rural areas
through the provision of dipping tanks with the necessary chemicals to ensure that
livestock is protected from diseases. The vets also aid farmers through advising them on
1
vaccines to use to protect their livestock from diseases. The vets also monitor buying and
selling of livestock to restrict the spread of diseases within regions. Livestock farmers are
also encouraged to sell their livestock to Eswatini Meat Wholesalers which then sells
boneless beef to international markets mainly the European markets. Besides the boneless
beef, farmers also sell their milk to Dairy Board which is also an agency under the
Ministry of Agriculture that sells milk to the local market and international markets. The
government of Eswatini also offers technical assistance to farmers through assigning
trained personnel to different communities known as Balimisi to assist farmers on
effective farming methods.
According to the Central Bank of Eswatini ( 2020) despite all these initiatives, Eswatini
continues to import more than it exports mainly relaying on imports from South Africa.
The trade balance of Eswatini has been fluctuating over time where a trade balance of
E387 million was recorded in 2018, E3.747 billion was recorded in 2019 and E2.810
billion was recorded in 2020. On the other hand, the value of exports increased from
E24.343 in 2018 to E28. 678 then dropped to E20. 071 billion in 2019 due to lock down
restrictions which was brought about by the COVID 19 pandemic. The value of imports
increased from E23.956 billion in 2018 to E24.931 Billion in 2019, there was also a
drastic drop in imports to E17.261 billion in 2020 due to lock down restrictions. This
implies that the main cause for the fluctuating trade balance of Eswatini is the lower
growth of export value compared to the growth of import value. Eswatini therefore
continues to have the challenge of low foreign exchange earnings due to unstable trade
balance which then results to unstable level of foreign exchange reserves (CBE, 2020).
Overview of Eswatini Trade
Composition of Eswatini Exports
Traded goods are classified by means of numerical codes which follow a Harmonized
System known as HS codes. Eswatini mainly exports to the Republic of South Africa,
Kenya and Nigeria, Botswana and European Markets. The top 10 exporters account for
about 86% of the overall exports. The top 10 exports of Eswatini include concentrates,
sugar, processed citrus fruits, organic chemicals, spirits and beverages wood, timber and
textile products. According to Central Bank of Eswatini (2020) the main countries of
destination for Eswatini’s exports were Republic of South Africa, Kenya and Nigeria, and
these exports increased by 59 percent, 318 percent and 68 percent respectively in the third
quarter of 2020. Total exports decreased by 28 percent in Q2 2020 and further drastically
increased by 68 percent in Q3 2020.
2
Table 0:1 Quarterly Exports Growth Rates of Eswatini
2019 2020
Partner Q1 Q2 Q3 Q1 Q2 Q3
1 Republic of -23% -5% 21% 11% -19% -27%

South Africa
2 Kenya -45% 88% -5% 15% -25% -55%
3 Nigeria 20% 39% -32% 33% 1% -32%
4 Mozambique -19% -14% 26% 13% 29% -54%
5 United 9% 0% -28% 73% -47% -13%
Republic of
Tanzania
6 Angola -80% 419% -73% 216% -92% 14%
7 Uganda -46% 6% -30% 124% -39% -13%
8 Botswana -52% 82% 37% 46% -50% -9%
9 Italy -86% 627% 31% -93% -2% 139%
10 Zimbabwe -53% 49% 21% 11% -19% -27%
Source: Eswatini Revenue Trade Database, 2020
On the side of imports from RSA remains Eswatini’s largest trading partner and its
imports declined by 23 percent in Q2 2020 and drastically improved by 42 percent in Q3
2020. Imports from China declined by 22 percent in Q2 2020 and then increased by 24
percent in Q3 2020. It is worth mentioning that the imports for the top 10 importers
account for 90 percent of the total imports. The imports for the top 10 importers declined
by 23% percent in Q2 2020 and remained stagnant in Q3 2020. The other main trading
partners are USA, Japan and European Markets. The main imports of Eswatini are fuel,
vehicles, electric equipment and machinery, cereals and pharmaceutical products,
Eswatini Revenue Authority (2020).
3
Table 0:2 Quarterly Imports Growth Rates of Eswatini
2019 2020
Partner Q1 Q2 Q3 Q1 Q2 Q3
1 Republic -16% 7% 8% 9% -16% -23%

of South
Africa
2 China -13% 36% -9% 15% -8% -22%
3 India -37% -18% 1% 18% 55% 23%
4 Mozambi -16% -18% -20% -35% -70% 6%
que
5 United -34% 95% 35% -41% 6% 18%
States of
America
6 Japan -11% 4% 32% -12% 28% -23%
7 Ireland -26% -10% 57% 29% -2% -54%
8 Singapore 9% 36% -29% -87% 82% -69%
9 Taiwan, -17% -31% 18% 42% -4% -16%
Province
of China
10 United 92% 145% 235% 25% -19% -97%
Arab
Emirates
Source: Eswatini Revenue Trade Database, 2020
Exports and Imports by Trade Partner
The Republic of South Africa remains Eswatini’s main trading partner with its exports
accounting for 66% of Eswatini’s overall exports and 73% of Eswatini’s imports are from
South Africa. It worth highlighting that countries such as China, United States of
America, Ireland, Japan and Taiwan, Province of China export significantly to Eswatini
but Eswatini does not export much to them. This is an issue of concern since it implies
that such countries do not provide a market for Eswatini’s exports.
4
Table 0:3 Eswatini Imports and Exports by Partner
Exports Imports
Partner E % of Partner E % of
Million Total Million Total
1 Republic of 19,207 66% Republic of 19,353 73%
South Africa South Africa
2 Nigeria 1, 830 5% China 1,890 7%
3 United 1,436 4% Mozambique 633 2%
Kingdom
4 Kenya 1,023 4% India 545 2%
5 Mozambique 543 3% United States 398 2%
of America
6 Italy 489 3% United Arab 380 1%
Emirates
7 United 397 2% Japan 328 1%
Republic of
Tanzania
8 Botswana 380 1% Ireland 253 1%
9 Namibia 347 1% Italy 226 1%
10 Uganda 323 1% Taiwan, 221 1%
Province of
China
Source: Eswatini Revenue Trade Database 2020
Trend Export Value and Import Value of Eswatini
The imports and Exports of Eswatini depict a trend that is almost similar with a lagging
effect which implies that an increase in exports in the previous year is likely to be
followed by an increased in imports in the following year. This is based on the fact if
exports increase that means that there is an increase in revenue for the firms of Eswatini
which they can then use to produce more and export to the international markets. In the
year 2020 both exports and imports drastically decreased by 30% and 31% respectively
which is the highest decline recorded in the past 10 years as depicted by the graph below.
5
40%
30%
20%
10%
0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
-10%
-20%
-30%
-40%
Exports Growth Rates Imports Growth Rates
Figure 0.1 The of Exports and Imports in the past 11 years

Trade openness shows how much the economy of Eswatini is open to trade its output with
the rest of the world. Trade openness has been on a downward trend in 2019 and 2020
with a decline recorded in 2020 due to the impact of lockdown restrictions which
negatively affected the flow of goods and services.
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Figure 0.2 Eswatini Trade Openness for the period 1990-2020

Export import ratio was constant between the years 2013 to 2017, it dropped in 2018 then
increased again in 2019 and was constant in 2020. The export import ratio has been on
upward trend from the year 2012 to 2017, this means that between that period the exports
of Eswatini were exceeding imports. In 2018 the ratio dropped but increased again in
2019 and maintained an upward trend in 2020.
6
1.40
1.20
1.00
0.80
0.60
0.40
0.20
-
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Export Import Ratio
Figure 0.3 Eswatini Export Import Ratio for the period 2010-2020
Both imports and exports of Eswatini have been increasing over the years with the highest
value of exports of E28.679 billion recorded in 2019 and the highest value of exports of
E24.931 billion was recorded in the same year over the past 11-year period. Eswatini has
been recording a trade surplus from 2013 to 2020, which means that between this period
exports have been above imports
35,000 4,000
3,747
30,000 3,000
2,682 2,811
25,000 2,318 2,488
2,000
1,813
20,000 1,374
1,000
15,000
387
-
10,000 -310
-834 -1,000
5,000 -1,097
- -2,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Exports Imports Trade balance
Figure 0.4 Exports, Imports and Trade Balance Overview

Overview on Foreign Exchange Reserves
According IMF balance of payments manual, foreign exchange reserves are assets that are
readily available to and controlled by Central Banks for meeting balance of payments
financing needs. One of these needs include; intervention in exchange markets to affect
the currency exchange rate. One of the main functions of the Central Bank of Eswatini is
7
to safeguard and strengthen the stability of the financial system. One of the prerequisites
of maintaining a stable financial system is through the management and maintenance of
an adequate level of foreign reserves. In times of crises, the reserves should be adequate
to buffer against balance of payments imbalances, settle the state’s liabilities towards
foreign creditors, and preserve the stability of the financial sector, CBE (2017). This
therefore implies that; an adequate level of reserves can increase market confidence that
the country is able to meet external obligations.
The Central Bank aligned with international benchmark standards, measures adequate
reserve levels by import cover which is the number of months reserves can sustain export
inflows. The increase in reserves has been driven by efforts of the central bank to cushion
the reserves position through acquiring foreign currency from the local market, that is
through mopping up some liquidity from the banking system that would ordinarily exist in
South Africa. Further helping the position in 2020 has been higher SACU receipts
compared to the previous years.
According to the Central Bank Eswatini (2020), the country’s reserves have been on a
steady increase over the four quarters of 2019, with the highest increase of 15.2 percent
recorded in the fourth quarter of 2019. The imports cover was constant at 2.3 months in
the second and the third quarter of 2019, it then increased to 2.6 months in the fourth
quarter of 2019. It is worth highlighting that import cover consistently trends below the
threshold of three months. This is considered to be a risk for the financial sector because
this implies that the financial sector is not liquid enough to withstand an economic crisis
for a period not exceeding 2.6 months. Moreover, inadequate reserves as presented by the
low import cover sends the signal that the country cannot maintain competitively priced
exports which will then lead to a decline in the receipts of foreign currency which is
needed by the financial sector to stimulate economic activity.
The inadequacy of reserves as presented by import cover does not necessarily mean that a
country will crash and burn. According to Moghadam and Sheehy (2011), income
generated by foreign assets can be used as supplements for depleted reserves. Their study
asserts that domestic firms that have significant foreign assets support the sustainability of
reserves through their foreign currency earnings. Banks and Non-Bank Financial
Institutions have about E45.23 billion worth of foreign assets, which account for a 70
percent share of annual GDP. Consequently, income generated from these foreign assets
can be added as part of reserves which can boost the import cover to above the recognized
benchmark of 3 months.
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Furthermore, this suggests that the import cover alone does not fully cover the dynamics
of the Eswatini economy as a measure of reserves adequacy since there is a supplement of
foreign income generated from foreign assets. There is therefore a need to keep track of
income generated by the foreign assets, which should be reported simultaneously with the
import cover since these two complement each other.
7,000 6,171 3.0

5,359
5,168
Millions
4,565 2.6
6,000 2.5
2.3 2.3
5,000 2.0 2.0
4,000 1.5
3,000 1.0
15.2%
2,000 0.5
13.2% 3.7%
1,000 0.0
-14.2%
0 -0.5
Mar-19 Jun-19 Sep-19 Dec-19
Gross Official Reserves Imports Cover Gross Official Reserves Growth Rates
Figure 0.5 Quarterly Overview of Foreign Exchange Reserves

Source: Central Bank of Eswatini Tables 2020
As at the end of June 2006, Gambia had external reserves equivalent to 4.1 months of
import cover, Sierra Leone had 2.1 months of import cover, Ghana had 3.6 months of
import cover, Guinea, two months and Nigeria had 23 months of import cover and the
region as a whole had 20 months of import cover (Wami, 2006). Apart from Nigeria, the
other countries reserve position fell far short of the six months import cover targeted for
2003. According to World Bank estimates, by the close of 2009, Gambia had external
reserves equivalent to 7.4 months of import cover, Sierra Leone had 7.2 months of import
cover, Ghana had 3.6 months of import cover, Guinea 2 months and Nigeria had 9.3
months of import cover and the region as a whole had 20 months of import cover. By the
close of 2010, Gambia had external reserves equivalent to 7.1 months of import cover,
Sierra Leone had 5.2 months of import cover, Ghana had 4.3 months of import cover, and
Nigeria had 4.9 months of import cover. The crave form international reserves
accumulation even in the face of challenges associated with low investment, culminating
in low economic growth in the sub-region brings to mind new questions to be answered
by international macroeconomics literature.
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1.1.1 Reserves to Import Ratio (Import Cover)
Import cover is often regarded seen as a measure of the number of months imports can be
sustained should all inflows (such as export revenue and external financing) cease.
According to (Fischer, 2001) a proper measure of reserve adequacy is the import cover,
which is basically a ratio of the foreign exchange reserves to imports. The threshold for
the import cover according to the rule of thumb judgement is 3 months. These 3 months
import cover criterion is one of the methods that has been set by the West African
Monetary Zone for the introduction of a single currency, even in the Common Monetary
Area the same rule is applied. In the Common Monetary Area countries such as; Eswatini,
Namibia, South Africa and Lesotho are involved, in this zone the agreement is to peg the
currencies of these countries to the South African Rand (the agreement also entails having
the South African rand in circulation in Lesotho and Eswatini). The amount of import
cover is a tool to ensure that there no hindrance in external trade transactions in the event
there are no foreign flows. This benchmark is especially relevant to low-income countries
that are vulnerable to economic shocks, such as a decline in the price of tourism receipts
due to natural disasters. The benchmark also plays a vital role to low-income countries
without significant access to capital markets, since it ensures that there are always in a
position to trade with the rest of the World (the benchmark means that countries are not
expected to have import cover below the set threshold).
1.2. Problem Statement
Eswatini has insufficient foreign exchange reserves to sustain the currency peg, to ensure
financial stability and to ensure that the central bank meets its policy objectives, since in
all the four quarters of 2019 Eswatini has been below the reserves threshold of 3 months
of import cover. This is a drawback to Eswatini because international reserves are of
paramount importance for countries like Eswatini that operate in a “quasi-currency board”
since she does not have her independent monetary policy, but instead adopted a currency
peg to the South African Rand (ZAR) which is considered to be a credible reference
currency, under the CMA. According to the Common Monetary Area (CMA) agreement,
the Lilangeni1 is pegged at par to the South African rand, this therefore means
maintaining the exchange rate peg is important for the Central Bank of Eswatini as
monetary policy authority of the country. Eswatini has to maintain a certain level for
reserves to sustain the currency peg since low reserves levels could imply that she would
not be in a position or have the ability to support the peg (CBE, 2017). Promoting
agricultural exports can be considered as alternative approach that can be used to boast the
10
foreign exchange reserves of Eswatini, hence there is a need to carry out a study that
looks at the effects of agricultural exports on foreign exchange reserves of Eswatini
1.3. Objectives of the Study
The main objective of the study is to examine the nature of the relationship that exist
between agricultural exports and foreign exchange reserves of Eswatini in the short run
and in the long-run during the period between 1990 and 2020.
The specific objectives of the study were to:

1. Estimate selected descriptive statistics of the variables, these variables are;
foreign exchange reserves, agricultural exports, SACU receipts, net foreign
assets, exchange rates, external debt to GDP, money supply to GDP and GDP
per capita.
2. Determine the trend of the determinants of Eswatini‘s foreign exchange
reserves and agricultural exports for the past 31 years.
3. Estimate the elasticity of Eswatini‘s of agricultural exports and foreign
exchange reserves
1.4. Hypothesis
H0: There is no significant no relationship between agricultural exports and foreign

exchange reserves
H1: There is a positive relationship between agricultural exports and foreign exchange
reserves
1.5. Significance of the Study
This paper investigates the effects of Agricultural exports on the Foreign exchange
reserves. The study also attempts to measure the determinants or drivers of foreign
exchange reserves in Eswatini, a subject that has been largely ignored in the literature. On
a lower level, this study will help in identifying the macroeconomic variables that affect
the levels of foreign exchange reserves so that the policy makers can pay attention to
those variables to in an effort to improve foreign exchange reserves.
11
1.6. Limitations of the study
The researcher was eager to assess the Effects of Eswatini Agricultural exports on Foreign
exchange reserves before 1990 however, due to unavailability of data, the study period
was limited from1990 onwards.
1.7. Definition of Terms
1. Domestic credit: refers to lending or credit that a country or territory's central

bank makes available to borrowers within the same territory. This may include
commercial banks and even involve the government itself.
2. Foreign Exchange Reserves: reserves are defined as external stock of assets,
which is available to the country’s monetary authorities to cover external payment
imbalances or to influence the exchange rate of the domestic currency through
intervention in exchange market, or for other purposes.
3. Foreign Flows: are the financial side of international trade; when a country
imports a good or service, the buyer (the importer) gives the seller (the exporter) a
monetary payment, just as in domestic transactions
4. Import Cover: is the number of months of imports that could be covered for by a
country's international reserves. Import cover is an important indicator of the
stability of a currency
5. Interest Rate Spread: Difference between lending rate and average deposit rate
6. Public Debt: is how much a country owes to lenders outside of itself. These can
include individuals, businesses, and even other governments also called sovereign
debt.
7. Terms of trade: Shows the relationship between the country’s export prices and
import prices, it can be defined as the ratio of export prices to import prices.
1.8. Chapter Summary
In this chapter an overview of agricultural exports and foreign exchange reserves was
made. First, the chapter presented some background information, Eswatini agricultural
Policy policies and the reserves position Eswatini in comparison against the benchmarks.
The last sections included the problem statement, objectives, research hypotheses,
significance of the study, limitations of the study and definition of terms. The next chapter
will discuss the literature review.
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CHAPTER 2
LITERATURE REVIEW
This chapter provides a review of literature related to foreign exchange reserves and
agricultural exports. The chapter also describes the theoretical approaches, empirical
studies and methodological review on the macroeconomic variables that are linked to
agricultural imports and foreign exchange reserves both directly and indirectly.
2.1. Theoretical Literature
2.1.1. Overview on trade theories

Trade theories are mainly divided into two categories and these include; traditional theory
(neoclassical) and new trade theories. Traditional trade theory mainly looks at the
principles of perfect competition, homogenous goods and constant returns to scale in
production of goods. These trade theories are namely; Adam Smith theory of Absolute
Advantage, David Ricardo of Comparative advantage, Heckscher and Ohlin of Factor
Endowments. The new theories of international trade are characterized by product
differentials, imperfect competition, increasing returns to scale and technological lags that
imply dynamic comparative advantage in trade (Jonsson and Subramanian, 2000).
2.1.1.1. Mercantilism Trade Theory and Imports

Mercantilism was the philosophy that guided European on matters regarding international
trade in many centuries before Adam Smith published his book entitled Wealth of Nations
in 1776. According to Mercantilists international trade is off paramount importance to a
nation since it comes with certain benefits to a nation. He further mentioned that due to
the benefits that come with international trade government regulation is necessary on
trade issues.
Mercantilism believed that the wealth and the well-being of a nation is based on minerals
such as gold and silver. Based on this notion countries were encouraged to export more as
opposed to importing because exports were regarded as good and imports (except for raw
materials not processed locally) were regarded as bad. If a country exported more to the
foreign countries than what the foreign country sells to it, the foreign country was
expected to pay for the excess goods it received through shipping silver and gold to the
country where it received the excess goods. According to the mercantilist the gain in gold
and silver was believed to be increasing the country ‘s well-being (Field and Appleyard,
2001).
13
Imports reduced the accumulation of precious metals hence they were not desirable and
regarded not good for a country’s economy. Gold and silver were also regarded as
important because it helped a country to maintain a large military in the times of war,
whilst imports or any other goods might not be available during such times. The
governments restricted imports to their countries through imposing taxes and introducing
limits to the quantity of goods that could be imported. The government promoted exports
by providing local firms with subsidies to stimulate their production. This therefore means
that the mercantilism viewed trade as a zero-sum game since one country gains at a loss of
another country since a surplus for a certain country is a deficit for another country hence
those two offset each other. The restriction on imports and promotion of exports was
beneficial to domestic producers because it protected them from competing with goods
from other countries, while at the same time ensuring that they increase a market for their
products internationally. According to this theory countries engaged in trade so that they
could hold more gold and silver, more especially exporting to other countries (Coats,
1975).
2.1.1.1.1 Limitations of the Mercantilism Theory

According to Adam Smith and other economists they believe that mercantilists promote
exports as opposed to imports and this has social implications on the welfare of
consumers, since their choice of goods is mainly limited to goods produced locally. Adam
Smith mentioned that the well-being of local consumers is then limited to consumption of
locally produced goods not goods produced internationally. The importance of national
production and exports is only indirect; they provide the income to buy products to
consume. He further mentioned that imports are part of the expansion of national
consumption that a country needs, they are not bad, and they are not therefore supposed to
be discouraged. Same thing applies to exports they are also important because through
exporting a country gets foreign currency which can be used to pay imports; but it is
worth mentioning that exports are not enough on their own, but the imports are important
as well. Trade that is properly carried out between countries can be beneficial to all
countries that engage in trade, which sums up the fact that trade contributes positively to
the wealth of nations. Adam Smith further mentioned that even the goal of acquiring gold
and silver has limitations which include increasing money supply which then results to an
increase in inflation, (Goldstein and Khan, 1978).
2.1.1.2. Adam Smith’s Absolute Advantage and Imports

In the year 1776 a Scottish by the name of Adam Smith introduced a trade the theory
called the theory of absolute advantage. The theory was emphasizing the fact that the
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trade between two countries is based on absolute advantage. He criticized the mercantilist
system and supported international trade, which includes both imports and exports. He
further alluded that fact that it is advantageous for nations to specialize in producing
goods they have absolute advantage in and while specializing they also have to practise
international division of labour. According to Adam Smith absolute advantage is a
situation where a country produces greater output of a good or service than a country
using the same amount of inputs or factors of production to produce. For instance,
suppose that Australia and Japan can both produce wool and electric cars. One worker in
Australia can produce 100kg of cotton or 5 electric cars per week. Whilst, one worker in
Japan can produce 50kg of cotton and 10 electric cars per week. This implies that
Australia has an absolute advantage in the production of cotton and Japan an absolute
advantage in the production of electric cars. In such instances, both nations would benefit
if each specialized in the production of the commodity of its absolute advantage and then
trade with the other nation. Australia will then export some of the cotton to Japan and
Japan will export some of its electric cars to Australia to ensure that these nations benefit
from trade (Mohr, 2004).
According to Adam Smith; tariffs and quotas should not aim at restricting international
trade but it should promote it to allow the flow of goods. As opposed to mercantilism
Smith argued that a country should focus on producing a good or service where it has an
absolute advantage on. This therefore means that a country is not expected to produce all
its goods for consumption but instead engage in trade for the nation to get goods it cannot
produce at low capacity. The theory of absolute advantage is in contrary to the
mercantilist idea which states that international trade is a zero- sum game. According to
the absolute advantage theory, international trade is a positive- sum game, because it is
beneficial to both countries that engage in trade. This theory is also different from the
mercantilism theory because it measures the nation's wealth by the living standards of its
people and not by the amount of minerals it has which are normally gold and silver.
Basically, this theory is production based, it states that productivity in producing a certain
good is the main determinant in deciding which goods a country will export (Smith,
1776).
A possible problem with absolute advantage, is that what happens if country does have
any absolute advantage in producing any good, does it mean that it wont engage in
international trade and benefit from it? This question is what brought the limitation to this
theory hence there was a need for economist to look into other ideologies not to relay on
this theory but instead work on improving it. A solution to this problem was discovered
15
by one economist by the name of David Ricardo who came up with the theory of
comparative advantage, which was an extension to the theory of absolute advantage.
2.1.1.3. The Ricardian Comparative Advantage and Imports

In 1817 David Ricardo introduced the theory of comparative which is still used in the
formulation of international trade policy. This means that it is important to have full
understanding of this theory when looking into issues of international trade more
especially when planning to improve or formulate trade policies. The theory of
comparative advantage states that a nation should specialize in the production and export
of the good in which its absolute disadvantage is smaller, which is known as comparative
advantage and import the commodity in which it‘s absolute disadvantage is great, which
is also known as comparative disadvantage. He further alluded to the fact that the theory
of comparative advantage is all about comparing opportunity costs among the trading
countries. Out of such practice specialization between nations then takes place to ensure
that they mutually benefit from trade.
One of the main assumptions of Ricardo (1817) was that the economy is mainly
characterized by perfect competition. This means that there is free entry and exit of firms
in the market without government interference. It also means that the market is highly
competitive and they are no monopolies and prices are determined by the forces of
demand supply. In addition, all participants have full access to market information, this
means that there is no information asymmetry. Ricardo also assumed that technology is
fixed for both countries fixed costs of production. This means that, the hours of labour per
unit of production of goods are fixed, regardless of the quantity produced. The model also
assumes that there are two countries and two commodities to make the analysis and its
applicability to life situations possible. Another assumption is that all factors of
production are immobile and both countries have the capacity to produce both goods. The
value of the flow of exports and imports balances implying that no country is in a trade
deficit which must be financed.
The comparative advantage theory also states that unrestricted exchange between
countries will increase the total amount of world output if each country tends to specialize
in those goods that it can produce at a relatively lower opportunity cost compared to other
trading partners. In a Ricardian world, trade is determined by relative efficiency in
production. Specialization in production will occur and because trading countries face the
same relative prices, specialization will occur in different goods, thus facilitating
exchange between the two trading countries. It is the difference in production efficiency
that determines the goods in which the country has a comparative advantage; as a result,
16
such a country will want to produce to export the product in which it has a comparative
advantage and import the product in which its absolute disadvantage is greater (this is the
commodity of its comparative disadvantage). The general policy implication is that
market access and supply capacity have to be considered equally important along with the
development process of the export sector.
2.1.1.3.1 Limitations of the Ricardian theory

Ricardo's theory assumes that only two nations and only two commodities yet in real
world situations, international trade involves several countries with different products.
The theory also assumes the existence of full employment in order to explain international
trade on an international trade basis, yet in a real-life situation full employment does not
exist. The theory also assumes that the costs of production are fixed, yet in countries the
costs of factors of production are likely to change more especially labour. The theory also
focuses mainly on the supply of goods since it states that each country should specialise in
producing goods that it has comparative advantage in and supply to the rest of the world.
It does not take into consideration the existence of demand yet there can never be supply
without demand, hence demand cannot be taken lightly (Dunn, Mutti and Suranovic,
2006).
The assumption that countries should have fixed technology means that the third world
countries would continue producing primary goods for which world demand has
decreased, using the same technology yet traditional production methods are not effective.
Technological advancement is important since it stimulates production so it has to be
taken into consideration. The other market structures such as joint producers ‘activities
and oligopolistic competition are important in the determination of optimal price and
quantity in the market, that is to say perfect market will never exist in the world.
2.1.1.4. Heckscher-Ohlin Theory and Imports

The Heckscher-Ohlin theory states that countries should produce and export goods that
require resources (factors) that are abundant in their country and import goods that require
resources in short supply in their country. This theory differs from the theories of
comparative advantage and absolute advantage since these theories focus on the
productivity of the production process for a particular good. Whereas, the Heckscher-
Ohlin theory is about specializing in producing goods using factors that are in abundant
supply in that particular country which makes it cheaper to produce and export to the rest
of the world. The Heckscher-Ohlin theory is preferred to the Ricardian theory by many
economists, because of its few simplified assumptions.
17
Leontief (1953) tested the validity of Heckscher-Ohlin theory in the U.S and he found that
the U.S was more abundant in capital compared to other countries; therefore, the U.S
would export capital- intensive goods and import labour-intensive goods. Leontief found
out that the U. S’s export was less capital intensive than import. According to Heckscher-
Ohlin the absence of factors is the main reason for a country to engage in trade, (Krugman
1980).
2.1.1.4.1 Limitations of the Heckscher-Ohlin Theory

The Heckscher-Ohlin Theory has been criticized base on the following reasons:
1. Nations do not initiate trade: this is done by individuals or

individual firms within nations.
2. There must be perfect information and perfect competition between
trading partners, which never happens in a real-life situation
3. They are limited because they do not look at either the transfer
of goods or direct investments.
4. They do not consider the role of technology and expertise in
the areas of marketing and management.
Theoretical Literature on Foreign Exchange Reserves

According to Gracia (1999), the demand for reserves can be explained using two
approaches, of which the first approach states that the movements of reserves is
responsive to the discrepancies between the required reserves and actual reserves the
country has. The second approach is in terms of the reserve holdings looks reserves from
monetary approach on the balance of payments side of things. According to this approach
a change in reserve holdings is related to the disequilibrium in the domestic money
market. The approach states that foreign exchange reserves are directly proportional to
excess demand for money. For instance, when domestic credit is constant, the foreign
exchange reserves will decrease because there will be an excess supply of money. This
therefore implies that foreign exchange reserves are a residual holding by a country.
Popovska (2003) are also in favour of reserve accumulation like other supporters main
reason being that under certain conditions like international trade associated conditions,
the central bank can boost economic growth through foreign exchange reserves instead of
consuming them. The reasons why exchange rate under-valuation can promote long-term
economic growth include: Firstly, accumulation of foreign exchange reserves has an
expansionary effect on relative prices of tradables, they increase with respect to prices of
non-tradables and wages in the short-term. However, this effect disappears as increased
18
profits are invested and lead to increased demand for nontradables and labor in the long
run. Secondly, undervaluation of the currency results to an increase in exports. Thirdly,
undervaluation lowers foreign currency prices of domestic real assets and thus attracts
foreign direct investment.
Gosselin and Parent (2005) used panel cointegration to assess the long run demand
function for a sample of eight Asian emerging market economies. Using data from 1980
to 2003, Gosselin and Parent (2005) found that reserves were explained by variables such
as Gross Domestic Product (GDP), ratio of imports to GDP, M32 to GDP and the
volatility of exports receipts. When analysing the behaviour of Asian Central banks after
the 1997-98 financial crisis, the authors found that, there is evidence of a positive
structural break in these country’s demand for international reserves during a financial
crisis. The actual level of reserves accumulated in 2003–04 was above the reserves that
were estimated by the model this was due to structural changes in the economy.
Heller (1966) analysed the determinants of the foreign exchange reserves and his findings
were that countries hold reserves for liquidity motives and to improve their propensity to
import. He further found that the optimal level of reserves depends on the costs of
adjusting to an external balance, the cost of holding the liquid international reserves and
the probability that there will actually be a need for reserves. On another note according to
(Clark 1970) that the need for reserves depends on the degree of variability of the home
country to international transactions. Clark (1970) achieved this by testing the
rudimentary theory of reserve-holding behaviour by coming up with a model with the
intention to analyse 38 countries. In his study he concluded that countries use reserves to
finance payments deficits, and then take make means to restore reserves to their actual
desired level. According to this author this was said to be the main driver of the level of
the international reserves, similar conclusions were also brought by Edwards (1996).
Streeter (1973) found a significant relationship between the level of foreign reserves and
countries trade deficit. In accordance to (Chowdhury at all, 2014) the groups determinants
of the foreign exchange reserves can be divided into 5 categories namely: economic size,
current account vulnerability, capital account vulnerability, exchange rate flexibility and
opportunity costs. Mendoza (2004) analysed the increase of the foreign reserves after the
Asian crisis and concluded that there was an increasing in the levels of the international
reserves in most of developing countries. On another note Nori (2011) found that the three
months of imports rule of thumb was enough to determine reserves adequacy, hence this
implies that governments should continually make means to increase the level of the
reserves.
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Jeanne (2007) came up with a simple framework to determine the optimal level of
reserves in order to deal with capital account crises. In his research he found that the
demand for reserves depends on; the size of the capital flows, the opportunity cost of
accumulating reserves; the relative risk aversion of the domestic consumer, and the
probability of a crisis. In addition, the same author in 2016 also developed a model for
optimal reserves management for closed economies by suggesting that the governments
should have more active policy for using foreign reserves, not only during balance of
payments or other types of crisis.
2.2. Empirical Literature
Bereket (2020) studied the relationship between exchange rate and volume of exports, and
they found a statistically significant positive relationship. However, other previous studies
by (Bekele 2019) found a negative and statistically significant relationship between the
exchange rate and volume of exports. Haitho (2013) conducted a study on the
determinants of volume of exports, found a positive relationship between volume of
exports and a country reserves position.
Agricultural exports play a significant role in the economy of Ethopia, it is therefore

important to study the effects of the demand-side and supply-side factors of Ethiopian
agricultural exports. Geda and Seid (2015) found Ethiopian agricultural exports are
affected by the exchange rate, gross domestic product growth, population or labour force,
institutional quality and trade policies. Gross Domestic Product and Population or labour
force were found to have a positive effect on the agricultural exports of Ethiopia. On the
other hand, authors such as (Gebrehiwot and Gebru, 2015) found variables such as trade
openness, foreign direct investment and infrastructures as determinants of Ethiopian
exports. Most studies that studied the determinants of agricultural exports using time-
series used econometric models yet others made use of the gravity model. However, some
studies used panel data for different countries and made use of the generalised moment
method (GMM) of estimation.
Bekele and Mersha (2019) found that there is a positive significant positive relationship
between gross domestic product and agricultural exports, whereas they found that trade
openness affects agricultural exports positively. Karamuriro and Karukuza (2015) found a
negative and significant relationship between gross domestic product and agricultural
domestic product, panel data was used to find the determinants of agricultural exports in
20
Uganda for the period 1980-2012. Studies by (Gururaj et al, 2016) found a negative and
significant relationship between foreign direct investment and agricultural export volume.
On another note (Cheffo, 2020) found a positive and significant relationship between
labour and agricultural exports. Boansi et al. (2014) conducted a study on determinants of
agricultural export trade in Ghana found a negative and significant association between
the labour force and volume of agricultural export.
Narayan and Bhattacharya (2019) found a negative significant relationship between

consumer price index, external debt and agricultural export. Sawore (2015) found a
positive and significant relationship between institutional quality, level of foreign
exchange reserves and agricultural exports while still other studies found a positive and
significant relationship between infrastructure, money supply to GDP and agricultural
export of developing countries infrastructure (Kebede, 2017).
Using data from Tunisia, Abdourahmane, Ludvig, Domenico and Taline (2004) using
OLS determined the drivers of foreign exchange reserves and reserves adequacy. In their
study they found that reserves were positively influenced by the size of the economy,
current account vulnerability and negatively influenced by the exchange rate volatility and
the opportunity cost of holding reserves (represented by the short-term interest rate
differential). In a similar manner, Suvojit, Ram and Benito (2008) used the Buffer Stock
Model to determine the optimal level of foreign exchange reserves in India. In his study
he found that opportunity cost and exchange rate volatility had significant effects on the
demand for foreign reserves by India.
Popovska-Kamnar, Miso and Artan (2017) used the Ordinary Least Squares (OLS)
estimation technique based on quarterly data for the period 2004-2016 from the state
statistical system they found that there is a statistically significant relationship among
foreign exchange reserve as a dependent variable and the policy interest rate, nominal
GDP and the exchange rate as predictor variables. On another note Romero (2005) used a
multiple linear regression model based on yearly data for the period 1980-2003. The aim
of the study was to determine if variables such as; the current account balance, exchange
rate regime and marginal propensity to import had a significant effect on China and
India’s levels of international reserves. The results from the study done India showed that
all the variables were significant predictors of the level of international reserves yet for
China, the results were unsatisfactory since most of the variables were weak predictors.
However, Romero (2005) on the other hand found that for both India and China, the
current account variable was a very significant predictor variable.
21
Badinger (2004) investigated the appropriate level of international reserves in European
region using the Vector Error Correction approach using quarterly data for the period
1985-1997. In his study he analysed the demand for the international reserves in small and
open economies (the case of Austria with formerly fixed exchange rate regime). The main
aim of using the Vector Error Correction approach was to establish whether: the Austrian
national bank is managing the international reserves rationally, and also to determine
whether the monetary approach to the balance of payments holds for Austria. If it does not
hold, this would mean that an excess of money demand (supply) is associated with an
inflow or outflow of international reserves in the short run. The conclusion was that
Austria’s long-run policy reserves are determined by the scale of the foreign trade,
uncertainty and opportunity costs of holding reserves (calculated as domestic minus
foreign interest rate). However, in the short run the reserve were found to be determined
by imbalances of the national money market and conformance to monetary policy.
Research on the level of international reserves was extensively done for emerging
economics more especially in Asian countries. In a similar context Dabla. (2011)
investigated the factors that influence foreign exchange reserves of India using the VECM
– Johansen Maximum likelihood vector error correction model. The author concluded the
shocks on imports and exchange rate had significant permanent effects on reserves and on
their level of volatility. On another note Chowdhury at all, (2014) conducted an analysis
on the determinants of the foreign reserves found that there was a significant positive
relationship between foreign exchange reserves, exchange rate, remittance, home interest
rate, broad money M2, Unit Price Index of export and import and per capita GDP.
2.3. Methodological Literature Review
According to Prabheesh, Malathy and Madhumathi (2007) variables that can be used in
the long run exchange reserves demand equation have been identified as follows
according to literature and these can be classified into five categories: namely the
economic size, current account vulnerability, capital account vulnerability, exchange rate
flexibility and the opportunity cost of holding reserves. (Table 2.1 below). The variables
also depend on the nature of the economy of the country, that is its monetary and fiscal
policy.
22
Table 0:1 Empirical Determinants of Foreign Exchange Reserves
Reserves determinant factors Variables

Economic Size GDP per capita; Population
Current Account vulnerability Imports/GDP; Exports/GDP; Current account deficit/
GDP
Capital account vulnerability Capital account deficit/GDP; external debt/ GDP;
money supply/GDP
Exchange rate flexibility Exchange rate volatility
Opportunity cost Interest rate differential
Based on the above classifications, the empirical foreign exchange reserves function was
estimated and it consisted of variables such as reserves to GDP ratio, the log of real GDP
per capita, the current account balance, total external debt to GDP ratio and the nominal
exchange rate Prabheesh, Malathy and Madhumathi (2007) variables found that variables
such as exports to GDP, money supply to GDP and exchange rate volatility have a
positive relationship with foreign exchange reserves.
Khomo, Mamba and Matsebula (2018) used the autoregressive distributed lag (ARDL)
approach which involves the use of: bounds testing and cointegration method of Shin et al
(2001) with the aim of modeling the determinants of foreign exchange reserves in
Eswatini. The advantage of this model is that it measures both short-run and long-run
relationship amongst the variables, through using the Error Correction Model and
cointegration techniques. According to Odhiambo (2008), the ADRL approach uses lags
of the response variable and the lagged values of the predictor variables, and from this the
short run effect of the model are estimated. The error correction model is the incorporated
in the short run equation in order to estimate the long run relationship. The ARDL bounds
testing procedure is done in two steps; the first being testing for the presence of a long-run
relationship among the variables. Then F-test to test for the significance of the joint
coefficients of the lagged levels of the variables is applied. The ARDL specification of the
foreign exchange reserves function was then estimated with variables such as changes in
the current account, interest rate differential, SACU receipts, changes in the current
account balance, government capital expenditure and exchange rates.
Upon using this model Khomo, Mamba and Matsebula (2018) found out that Eswatini’s
foreign exchange reserves were determined by variables such as GDP per capita, SACU
receipts and movements in the exchange rate which both have a positive contribution to
23
foreign exchange reserves. Lastly government expenditure and developments in the
current account have a negative contribution to foreign exchange reserves.
Kamnar, Nikolov and Sulejmani (2018) estimated Determinants of The International

Reserves in The Republic of Macedonia using multinomial regression (OLS) model. The
multinomial regression model was chosen because of the following reasons: 1.) Through
this model it was possible determine the explanatory power of the selected predictor
variables towards the dependent variable through the coefficient of determination, 2.)
Secondly OLS regression shows whether the predictor variables have statistically
significant impact to the response variable and 3.) Through the model it is possible to
determine the linkage or correlation the explanatory variables with the dependent variable.
In the model there were 4 independent variables, which were the exchange rate
(euro/denar), the nominal GDP, Unit Price Index of export and the policy interest rate and
the international reserves as a dependent variable. The series of data used in the model are
quarterly data for the period 2004-2016 obtained from the database of the National Bank
of Republic of Macedonia and the State statistical office. The following diogenitic tests
were conducted to avoid spurious regression: Breusch-Godfrey Serial Correlation LM
Test, Heteroscedasticity Test: White, Histogram Normality test and Ramsey Reset test.
Additionally, a correlation matrix was conducted and the variance-inflation factor-VIF
was calculated to check for multicollinearity in the model.
The findings after conducting these tests were that all the four predictors variables which
were exchange rate (euro/denar), the nominal GDP, Unit Price Index of export and the
policy interest had a positive effect on the international reserves.
Khan and Ahmed (2005) used the Vector Error Correction Model to estimate the Demand
for international reserves in Pakistan consisted of variables such as variability measure of
the variations in the balance of payments, money market rate, the average propensity to
import, the level of imports and workers’ remittances. Elbadawi (1990) was followed in
taking remittances as one of the explanatory variables of reserves, with other predictor
variables such as; variability in the external accounts, marginal propensity to import, trade
openness, demand for foreign reserves, opportunity cost for holding reserves
The relationship between balance of payments variability and reserves stems from the fact
that reserves serve as a buffer stock whose role is to accommodate variations in external
transactions. It is, therefore, expected that this relationship must be positive that is to say
increased variability in the external accounts will cause an increase in the optimal level of
reserves and vice versa. This study by Elbadawi (1990) used imports as a scale variable.
24
Since, there is strong evidence in the literature that scale of international reserves affects
reserves positively, the sign of imports elasticity was expected to be positive. The sign of
the average propensity to import variable was not clear from the existing literature.
On one side, the variable was taken as a proxy for the marginal propensity to import,
which affects reserve negatively in the Keynesian Model. While on the other hand it is
used as a proxy for trade openness. This relationship was expected to be positive as
increased openness means increased vulnerability to foreign shocks, which should lead to
increase in the demand for reserves. The opportunity cost of reserves, normally measured
as the difference between the social rate of return on capital and the return on reserves,
affects reserves inversely. In this study, money market rate was used as the opportunity
cost of reserves because of the non-availability of its true measure. The idea of using
remittance in the analysis of reserves demand function was taken from the study of
Elbadawi in 1990.
With all those expectations discussed, after running the model; variables such as balance
of payments, money market rate, the average propensity to import and workers’
remittances were found to have a positive effect on international reserves, yet the level of
imports had a negative effect on the international reserves.
2.4. Summary of the Literature Review
The general consensus from literature is that developing countries mainly export
agricultural products because of the comparative and the absolute advantage they have in
producing agricultural exports. Through exporting these agricultural exports, they then get
foreign currency which is regarded as reserves, the foreign exchange that is received when
exporting these agricultural exports is then used to import from other countries to ensure
that consumer demand is met. From literature the predictor variables for the for foreign
exchange reserves were found to be; agricultural exports, exchange rates, debt to GDP
ratio, SACU receipts, net foreign assets GDP growth and money supply to GDP ratio. The
autoregressive model was considered to be the best for developing countries with a few
data points like Eswatini. This is because of its ability to capture short and long-term
dynamics through the use of the Error Correction Model, the model also works with I (0)
and I (1) variables which is normally the case with economic variables. The model is
robust enough to regress the variables even if they are off different order of cointegration.
It is worth highlighting that upon comprehensive review of literature the subject of

foreign exchange reserves has been largely ignored in research, hence a gap in literature
25
around this topic was discovered more especially in developing countries. The mostly
published information on foreign exchange reserves is the reserve position by country, but
there is less research speaking to those figures, that is to say there is less research
zooming in to the reasons behind those reserves positions. This study will therefore add to
body of knowledge on this largely ignored subject, yet important in international trade.
26
CHAPTER 3
METHODOLOGY
3.1. Introduction
The study applied the autoregressive distributed lag (ARDL) bounds testing cointegration
method of Shin et al (2001) to model the effects of agricultural exports on foreign
exchange reserves in Eswatini. This model allows for investigating of the short-run and
long-run relationship amongst the variables of interest through the use of the ECM and
cointegration techniques. According to Odhiambo (2008), the ADRL approach uses lags
of the dependent variable and the lagged contemporaneous values of the independent
variables such that the short run effects in the model can be directly estimated and the
long-run equilibrium relationship indirectly estimated.
This model is chosen for the study due its flexibility in estimating the long and short run
relationships of variables with different orders of cointegration, that is to say the ARDL
approach can be applied regardless of whether the variables in the model are stationary, I
(1) or fractionally integrated (although not I (2); the model allows for simultaneous
estimation of both short-run and long-run parameters. Secondly the model is also good for
small sample sizes and lastly the ARDL model is valid even if the explanatory variables
are endogenous (Kumar, 2010). The ARDL bounds testing procedure follows two steps;
the first being testing for the presence of a long-run relationship among the variables.
Then the second step is the F-test to test for checking the existence for the joint
significance of the coefficients of the lagged levels of the variables.
3.2. Data Sources
This thesis used the secondary data for GDP per capita, external debt, agricultural exports,
exchange rates, SACU receipts, net foreign assets and money supply. The datasets for
GDP per capita, external debt, net foreign assets, foreign exchange reserves, exchange
rate and money supply, was obtained from the Central Bank of Eswatini Quarterly Tables.
Agricultural exports data was obtained from the SRA Trade Database. SACU receipts
figures was obtained from the Ministry of Finance Medium Term Framework excel sheet.
All this data is on an annual basis, and it covers the period 1990-2020.
27
3.3. Data Analysis
Time series data consisting of Eswatini agricultural exports and all the other variables
listed above for the period 1990 – 2020 was used. Quantitative data was tabulated and
presented in graphs. EViews was used for data analysis in order to achieve the objectives
of the study.
3.3.1. Descriptive statistics of the variables

The study employed descriptive statistics; means, median and standard deviation of the
predictors of Eswatini’s agricultural exports
3.3.2. Trend of Eswatini’s Foreign Exchange Reserves and its determinants for the
period 1990-2020
The study employed graphs to describe the trend of the Eswatini agricultural and its
predictor variables.
3.3.3. The elasticity of Eswatini’s Agricultural Exports and its determinants.

The study employed the autoregressive distributed lag model to describe the influence of
the predictor variables to foreign exchange using the following steps
3.3.3.1. Model Specification

The ARDL specification of the foreign exchange reserves function is therefore
represented
as follows; ∆𝑙𝑛𝐹𝑋𝑡 = 𝛼0 + 𝛼1 𝑙𝑛𝐼𝑀𝑃𝑡−1 + 𝛼2 𝐺𝐷𝑃𝑡−1 +𝛼3 𝑙𝑛𝑁𝐹𝐴𝑟𝑡−1 + 𝛼4 𝐷𝑒𝑏𝑡𝑡−1 +
𝛼5 𝑀𝑆𝑡−1 + 𝛼6 𝑅𝑒𝑥𝑡−1 ∑𝑛𝑖=1 𝛽1 ∆𝑙𝑛𝐼𝑀𝑃𝑡−𝑖 + ∑𝑛𝑖=1 𝛽2 𝐺𝐷𝑃𝑡−𝑖 + ∑𝑛𝑖=1 𝛽3 𝑙𝑛𝑁𝐹𝐴𝑟𝑡−1 +
∑𝑛𝑖=1 𝛽4 𝐷𝑒𝑏𝑡𝑡−𝑖 + ∑𝑛𝑖=1 𝛽5 𝑀𝑆𝑡−1 + ∑𝑛𝑖=1 𝛽6 𝑅𝑒𝑥𝑡−𝑖 + 𝜇𝑡 ..(1)
Where lnFX: Reserves, GDP: GDP per capita, Debt: External Debt to GDP ratio, IMP:
Agricultural Imports. MS: Money Supply to GDP ratio, Rex: Real Exchange Rate and
NFR: Net Foreign Assets. Before estimating this model, stationarity test is important to
test to conduct.
Unit Root Test for Stationarity
The augmented Dickey Fuller test was conducted under the assumption that the errors
(residuals) are serially uncorrelated. Sometimes if data is exponentially trending then
there might be a need to take the log of the data first before differencing it. In that case, in
the Dickey-Fuller unit root tests there will be a need to take the differences of the log of
the series rather than just the differences of the series. Before modelling in time series, the
28
order of stationarity of the variables was determined and then employed the ADF based
on the following regression:
∆𝑍𝑡 = 𝛽0 + 𝛽1 𝑍𝑡−1 + 𝛽2 ∑ℎ𝑖=1 ∆𝑍𝑡−𝑖 + 𝜇𝑡 𝑤ℎ𝑒𝑟𝑒
𝑢𝑡 ~𝑖𝑖𝑑(0, 𝜎 2 )
Where
∆𝑍𝑡−1 = (𝑧𝑡−1 − 𝑍𝑡−2 )
∆𝑍𝑡−2 = (𝑍𝑡−2 − 𝑍𝑡−3 )
𝜇𝑡 is the error term.
(Walgenbach, Norman , Dittrich, and Hanson, 1973) The null hypothesis of the
Augmented Dickey-Fuller t-test is
𝐻0 : 𝜃 = 0 (i.e., the data needs to be differenced to make it stationary)
𝐻1: 𝜃 < 0 (i.e., the data is trend stationary and needs to be analysed by means of using a
time rend in the regression model instead of differencing the data).
The Dickey-Fuller t-statistic does not follow a standard t-distribution as the sampling
distribution of this test statistic is skewed to the left. If the critical values of the 𝑡 exceeds
the Dickey Fuller critical value, the hypothesis that the given time series is not stationary
is rejected.
Lag Selection Model
The Akaike Information Criterion (AIC) used to select the appropriate number of lags, as
it is a consistent model-selector. The AIC was also used because of its ability to ensure
that not much data is lost during the lag selection. The AIC was also used because it deals
with the trade-off between the goodness of fit of the model and the simplicity of the
model. This implies that AIC caters for risks associated with overfitting and underfitting
of all econometrics model.
Cointegration Test
The test for cointegration is conducted using the Error correction model (ECM), this
model makes use of the trace and maximum statistic. Cointegration means that there is
correlation among variables in the model. If there are two variables, we can try to find the
relation between them and with this relation, there will be a series of residuals. The
bounds test was used to test for the existence of cointegration.
29
Bounds Testing
Bounds Tests is for determining the existence of a long-run relationship for a group of
time-series data that is stationary. An "F-test" of the hypothesis, H0: θ0 = θ1 = θ2= 0;
against the alternative that H1 is not true is performed. A rejection of H0 implies that we
have a long-run relationship. If the statistic lies between the bounds, the test is
inconclusive. If it is above the upper bound, the null hypothesis of no level effect is
rejected. If it is below the lower bound, the null hypothesis of no level effect cannot be
rejected.
Error Correction Model
Error Correction Models (ECMs) are a category of multiple time series models that
directly estimate the speed at which a dependent variable Y - returns to equilibrium after a
change in an independent variable(x). ECMs are useful for estimating both short term and
long-term effects in time series. ECMs are useful models when dealing with integrated
data, but can also be used with stationary data. The basic structure of an ECM:
∆𝑌𝑡= ∝ +𝛽∆𝑋𝑡−1 − 𝛽𝐸𝐶𝑡−1 +𝜀𝑡
Where EC is the error correction component, ∆𝑌𝑡 change in response variable, ∆𝑋𝑡−1 is
the change in the predictor variable, 𝛽 regression coefficient and 𝜀𝑡 is the error term.
Procedure for Autoregressive Distributed Lag Model
1. The test for stationarity was conducted to ensure that none of the variables are I
(2), as such data will invalidate the methodology.
2. The appropriate lag structure for the model was determined.
3. The “unrestricted" error-correction model (ECM) was formulated
4. Estimated the short-run model
5. The long run "levels model" was estimated.
The ARDL model was used because; it allows each variable to be treated as independent
or dependent variable in the equation. Secondly this model is often more influential to
explain the dependent variable. It can also trace the causal relationship among variables,
which is one of the main purposes of this research and lastly it can detect the policy-
controlled variable (s).
30
3.4. Chapter Summary
This chapter basically sought to describe in detail the type of data necessary to describe
the effects of agricultural exports on foreign exchange reserves of Eswatini. It also
developed the relevant model to be used for purpose of manipulating the data to yield the
needed results. The autoregressive distribute lag model was chosen as the appropriate
model for analysing the data necessary because of its effectiveness in capturing long and
short-term effects of the independent variables on the dependent variable.
31
CHAPTER 4
DISCUSSION OF RESULTS
This chapter presented the results and discussions of the study. Firstly section 4.1 outlines
the descriptive statistics of all the variables that have been analysed. Secondly section 4.2
discusses the trend of foreign exchange reserves and its predictor variables for the last 31
years and lastly section 4.3 captures the results of the autoregressive distributed lag model
4.1. Descriptive Statistics
The first objective of the study sought to describe selected descriptive statistics of the
variables of the predictor variables of foreign exchange reserves. This analysis was
carried out using the data source as illustrated in table 4.1 below and included in the
econometric analysis to achieve the objectives of the study. As it is clearly shown on
Table 4.1, the average for agricultural exports is E5,490,207. The average real Exchange
rates is USD 8.00, the average for External Debt to GDP is 0.18. The average for Foreign
Reserves is E3,864,088 and the average for GDP per CAPITA is 24.40. The average for
net foreign assets is E4,338,847 and the average for SACU Receipts is E3,478,499
Table 0:1 Descriptive Statistics
Variable Mean Median Std deviation

Agric Exports 5,490,207 4,548,178 48,812
Exchange rates 8.00 7.32 2.56
External Debt to GDP 0.18 0.17 0.07
Foreign Reserves 3,864,088 2,604,600 31,625
GDP per CAPITA 24.40 17.94 4.15
Money Supply to GDP 0.07 0.06 0.05
Net Foreign Assets 4,338,847 3,294,699 15,338
SACU Receipts 3,478,499 2,771,920 338,280
Source: Author’s Own Calculations, 2021
Prior to conducting the ARDL model tests such as; the bounds test for cointegration test,
unit root tests were performed on the variables to understand their order of integration.
Although the ARDL method does not necessitate all variables to be integrated of the same
order 1 (i.e. I (1)), it is important that the variables are not I(2) as the F-test would provide
spurious results (Odhiambo, 2008).
32
4.2. Trend of the determinants of Eswatini’s Agricultural Exports and its predictor
variables.
The second objective of the study was to determine the trend of Eswatini’s foreign
exchange reserves and its predictor variables for the last 31 years. This analysis was
carried out using the data source as illustrated in the figures below.
4.2.1. Eswatini’s Foreign Exchange Reserves

Foreign exchange reserves are also fluctuating over the years with the highest amount of
E 8. 484 billion recorded in 2015, the lowest level of foreign exchange reserves was of
E531.525 million was recorded in 1990. Otherwise as depicted by the trendline foreign
exchange reserves have been on an upward trend for the past 31 years.
9,000
Millions
8,000
7,000
6,000
5,000
Foreign Reserves
4,000
3,000 Trendline
2,000
1,000
-
-1,000
Figure 0.1 Trend for Foreign Exchange Reserves for the period 1990-2020
4.2.2. Eswatini’s Agricultural Exports
Overall the agricultural exports Eswatini depicted an upward trend over the years with
highest value of E11.901 billion recorded in 2019, and it dropped to E11.649 billion in
2020. The decline in 2020 was due to the introduction of lock down restrictions towards
the end of the year which led to a decline in business activities thus affecting trade
negatively.
33
14,000
Millions
12,000
10,000
8,000
Agric Exports
6,000
Trend Line
4,000
2,000
Figure 0.2 Trend for Agricultural Exports for the period 1990-2020
4.2.3. SACU Receipts Trend for the past 31 Years
SACU receipts are fluctuating over the years with the highest receipt of E8.348 billion
recorded in the year 2020, they have been fluctuating over the years with an upward trend
which was due to an increase in trade among the SACU member countries.
9,000
Millions
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
-1,000
-2,000
SACU Receipts Trendline
Figure 0.3 Trend for SACU Receipts for the period 1990-2020
4.2.4. Exchange Rates
Exchange rates have been on an upward trend over the years with the highest value of
E14.95 recorded in the year 2017 and the lowest value of E2.56 recorded in 1990.
34
16.00
14.00
12.00
10.00
8.00 Exchange rates
6.00 Trend Line
4.00
2.00
-
Figure 0.4 Exchange Rates for the period 1990-2020

4.2.5. GDP per Capita
The GDP Per capita income or average income measures the average income earned per
person in a given area in a specified year. It is calculated by dividing the area's total
income by its total population. Per capita income is national income divided by population
size. The indicator is a basic economic indicator and measures the level of total economic
output relative the population of a country. It reflects changes in total well-being of the
population. The GDP per capita has been constantly increasing over the years.
70
60
50
40
30 GDP per CAPITA
20
10
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Figure 0.5 Trend GDP per CAPITA for the period 1990-2020
4.2.6. External Debt to GDP
The ratio of a country’s foreign debt to its gross domestic measures the country’s foreign
indebtedness against its domestic produce. A lower ratio means that the country has less
foreign debt. For Eswatini the foreign debt to GDP ratio has been on a downward trend
35
over the years which is a good indication that Eswatini is properly managing its foreign
debt.
0.3
0.25
0.2
0.15
0.1
0.05
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Figure 0.6 Trend for External Debt to GDP for the period 1990-2020
4.2.7. Money Supply to GDP
The money supply to GDP ratio has been on upward trend over the past 31 years with the
lowest ratio of 5% recorded in 1998 and the highest value of 10.8% recorded in 2019.
0.12
0.1
0.08
0.06 Money Supply to GDP

Trendline
0.04
0.02
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Figure 0.7 Trend for Money Supply to GDP for the period 1990-2020
36
4.2.8. Net Foreign Assets
Net foreign assets have been on an upward trend for the past years as denoted by the
trendline but it’s worth mentioning that in some years there were fluctuations. The highest
value of net foreign assets of E9.275 billion was recorded in 2020, and the lowest value of
net foreign assets of E636.319 million was recorded in 1990.
10,000
Millions
9,000
8,000
7,000
6,000
5,000 Net Foreign Assets
4,000 Trendline
3,000
2,000
1,000
-
Figure 0.8 Trend for Net Foreign Assets for the period 1990-2020
4.3. The elasticity of Eswatini’s foreign exchange reserves and its predictor
variables
The second objective was to estimate the elasticity of foreign exchange reserves and its
predictor variables. The autoregressive distributed lag model was used to find the
elasticities, but before applying diagnostic tests were conducted to find out if the model
best fits the data. The diagnostic tests that include stationarity and bounds test were
conducted. Firstly, the diagnostics tests are outlined before the actual model was ran.
4.3.1. Stationarity Test Results

The Augmented Dickey Fuller (ADF) was applied to test for stationarity of the series and
the results are presented in Table 4.2 below. Both test statistics confirm that the order of
integration of the variables is I (1) and I (0) hence the ARDL model can be used as the
estimation method. The only variable that is stationary at initial level is the External Debt
to GDP Ratio. The other variables such as’ LgAgricexports, exchange rates, Lg Foreign
Reserves, GDP per Capita, Money Supply to GDP, Lg Net Foreign Assets and Lg SACU
Receipts stationary after first differences, which means that they are of order I (1). Given
the unit root test results and confirmation that none of the variables is I (2), we proceeded
to test for cointegration and the results are stated in Table 4.4 below.
37
Table 0:2 Stationarity Test Results: Augmented Dickey-Fuller
Augmented Dickey-
Fuller
Level First
Difference
Intercept Intercept Intercept Conclusion
Variable Intercept
and trend and trend
Lg_Agricexports -0.3502 -2.8531 -6.9257*** -6.9257*** I (1)
Exchange rates -1.4806 -2.3798 -5.1681*** -5.1412*** I (1)
External Debt to -6.3596 -6.3595 -11.0841*** - I (0)
GDP Ratio 11.0841***
Lg Foreign Reserves -1.0031 -4.4612*** -4.5545*** -4.5545*** I (1)
GDP per Capita -2.3545 -0.7419 -4.6981*** -5.7358*** I (1)
Money Supply to 1.0327 -2.5651 -5.5613*** -6.5167*** I (1)
GDP
Lg Net Foreign -1.4470 -3.7464*** -4.6515*** -4.9168*** I (1)
Assets
Lg SACU Receipts 1.3637 1.3637 -5.0864*** -5.1158*** I (1)
Notes: *; **; *** denote significance at 10%, 5% and 1% respectively
Table 0:3 Stationarity Test Results: Philips Peron Test
Philips Peron Test

Level First
Difference
Intercept Intercept Intercept Conclusion
Variable Intercept
and trend and trend
Lg_Agricexports -0. 6647 -2.5612 -10.7810*** -10.7810*** I (1)
Exchange rates -1.6284 -2.8421 -8.1197*** -8. 2431*** I (1)
External Debt to -5.5639 -5.5639 -10.1308*** -10.1308*** I (0)
GDP Ratio
Lg Foreign Reserves -1.1072 -4.1859*** -6.6821*** -6.6821*** I (1)
GDP per Capita -2.4961 -0.8698 -7.8175*** -7.8175*** I (1)
Money Supply to 1.6475 -3.0631 -5.9921*** -6.7264*** I (1)
GDP
Lg Net Foreign -1.7005 -3.4401*** -6.4831*** -6.8501*** I (1)
Assets
Lg SACU Receipts 1.7441 1.7441 -9.4271*** -9.8271*** I (1)
38
4.3.2. Cointegration Test
The results in Table 4.4 reveal that the variables Lg_Agricexports, External Debt to GDP
Ratio, exchange rates, Lg Foreign Reserves, GDP per Capita, Money Supply to GDP, Lg
Net Foreign Assets and Lg SACU Receipts are cointegrated since the bounds test F
statistic of 5.9244 exceeds the upper bound critical values at a 1% confidence level based
on Pesaran et al (2001). The implication of the result is that the null hypothesis of no
cointegration is rejected and we conclude that a long-run relationship exists between
Eswatini’s foreign exchange reserves and the other predictor variables. Upon factoring the
optimal lags using the AIC criterion the final optimal model for the bounds test was
ARDL (1,2,0,1,0,2,1,2), where numbers in the brackets denote the number of lags selected
for each predictor variable against the dependent variable.
Table 0:4 ARDL Bounds Test for Cointegration

ARDL (1,2,0,1,0,2,1,2)
F-Statistic 5.924422*** I(0) I(1)
Asymptotic Critical values 10% 1.92 2.89
5% 2.17 3.21
1% 2.73 3.90

4.3.3. Short-run ARDL Results
Table 4.5 shows that the lagged error term of the cointegration equation or the Error
Correction Model is negative and statistically significant (-0.24365), indicating that about
24% of disequilibrium in the long-run reserves equation is corrected every year, implying
a moderate adjustment process back to equilibrium. The coefficient for exchange rates,
and Lg SACU Receipts are statistically significant and they have positive relationship
with foreign exchange reserves of Eswatini. The results show that SACU receipts are
positively related to foreign exchange reserves since a 1% increase in SACU receipts
leads to a 0.2318% increase in foreign exchange reserves in the short run. The results
indicate that exchange rates is positively related to foreign exchange reserves since a unit
increase in exchange rates induces a 0.66% increase in foreign exchange reserves in the
short-run. Lastly, the results also indicate that net foreign assets are negatively related to
foreign exchange reserves since a 1% increase in net foreign assets leads to 0.809%
decline in foreign exchange reserves in the short run.
39
Table 0:5 Model Results: Short-Run Error Correction Model Coefficients Results
Variable Coefficient Std. Error T-Statistic
Exchange rates 0.6611*** 0.2333 2.8341

External Debt to GDP Ratio 1.2118 1.3174 0.9198
Lg Agric Exports 0.4860 0.4210 1.1544
GDP per Capita -0.5551 0.4614 -1.2029
Money Supply to GDP 6.6079 5.1751 1.2769
Log Net Foreign Assets -0.8099* 0.4338 -1.8667
Lg SACU Receipts 0.2318* 0.1197 1.9371
Cointeq(-1) -0.2436*** 0.2405 -4.7545
4.3.4. Long-run ARDL Results
The long-run coefficients of the ARDL model are presented in Table 4.7, The coefficient
for exchange rates, Lg agric exports, money supply to GDP, Lg net foreign assets, and Lg
SACU Receipts are positive and statistically significant which means that they have a
positive relationship with foreign exchange reserves in the long run. According to the
results a one unit increase in exchange rates leads to a 0.63% increase in the value of
foreign exchange reserves in the long run, this supports findings by; Chowdhury at all,
2014, Khomo, Mamba and Matsebula (2018) and refutes findings by Abdourahmane,
Ludvig, Domenico and Taline (2004). The results also indicate that the relationship
between the level of reserves and the exchange rate is positive, as expected since a
depreciation in the local currency leads to a rise in reserves when expressed in local
currency terms.
A 1% increase in SACU receipts results to 0.43% increase in the long-run which implies
that SACU receipts have a positive relationship with foreign exchange reserves in the the
long-run. This is because SACU receipts are received in foreign currency which is the
South African Rand hence increasing foreign exchange reserves balance. This supports
findings by Khomo, Mamba and Matsebula (2018).
A 1% increase in agricultural exports leads to a 1.61% increase in foreign exchange

reserves in the long run, this is in line with Parent (2005)’s findings. This is as per a priori
theoretical expectations because when two countries engage in trade the exporting country
40
which is Eswatini in this case receives foreign currency which then increases the foreign
exchange reserve balance.
On the other hand one unit increase in money supply to GDP leads to a 0.62% increase in
foreign reserves in the long run, this supports findings by Gracia in (1999). This supports
prior expectations because given the 1:1 currency pag making it possible to purchase the
South African Rand which is equivalent to the Swazi Lilangeni. This means that the more
money in the hands of the local citizens of Eswatini the more the likelihood for them to
purchase the South African Rand or the more the likelihood to convert the Swazi
Lilangeni to the Rand if the need arises hence increasing the foreign exchange reserves.
Lastly a 1% increase in net foreign assets leads to a 0.83 % increase in foreign reserves in
the long run, this supports findings by Moghadam and Sheehy (2011). This is because
foreign currency earnings are generated from foreign assets and these boost the reserves
for the domestic economy, which is Eswatini in this case.
Table 0:6 ARDL Model Results: Long-Run Coefficients Results
Variable Coefficient Std. Error T-Statistic

Exchange rates 0.6292*** 0.2708 2.3232
External Debt to GDP Ratio 0.9271 0.9814 0.9446
Lg Agric Exports 1.6126** 0.3800 4.2438
GDP per Capita -0.4246 0.3605 1.1778
Money Supply to GDP 0.6195*** 0.1780 3.4806
Lg Net Foreign Assets 0.8264** 0.3232 2.5565
Lg SACU Receipts 0.4318*** 0.1278 3.3800
C 12.6860*** 1.8408 6.8918
Diagnostic Tests
Adjusted R2 0.9496
Serial Correlation Test 3.8698***
(0.1444)
Heteroscedasticity (BPG) 14.69192***
(0.5473)
4.3.5. Granger causality test

According to the concept of Granger causality, ‘X causes Y’ if and only if the past values
of X help to predict the changes of Y. While, ‘Y causes X’ if and only if the past values of
Y help to predict the changes of X. According to the results for the pairwise Granger
41
causality test agriculture exports granger causes foreign exchange reserves, which implies
that agricultural exports can be used to explain foreign reserves. Since the F statistic is
high we reject the null hypothesis that says Agricultural exports does not Granger cause
Foreign Exchange Reserves and conclude that Agricultural exports does lead foreign
exchange reserves.
Table 0:7 Granger causality test Results

Null Hypothesis F-Statistic
D (Ln Foreign Reserves) does not Granger Cause D (Agric Exports) 0.20923
D (Ln Agric Exports) does not Granger Cause D (Ln Foreign Reserves) 32.676***

4.3.6. Model Stability Tests
It is important to test the reliability of the model before using the results to inform policy
and to come up with recommendations. The following methods were used in order to
establish the stability of the model.
4.3.6.1. Residual Plot

Figures 4.9 and 4.10 show plots of the cumulative sum of recursive residuals (CUSUM)
and cumulative sum of squares of recursive residuals (CUSUMQ). If the CUSUM and
CUSUMQ lie outside the boundaries the model is considered to be unstable since that
means that the error term or the disturbance has noise which may due to the structural
breaks in the datasets that was analysed. The tests mainly provide a diagnostic tool for the
detection of unknown structural breaks in the data set. According to the reported statistics
(CUSUM and CUSUMQ) are within the boundaries, confirming stability of the model,
which therefore means that the ARDL model was found to be stable and effective in
analysing the dataset.
12
-4
-8
-12
09 10 11 12 13 14 15 16 17 18 19 20
CUSUM 5% Significance
42
Figure 0.9 Cumulative Residuals
1.6
1.2
0.8
0.4
0.0
-0.4
09 10 11 12 13 14 15 16 17 18 19 20
CUSUM of Squares 5% Significance
Figure 0.10 Cusum Squared Residuals

43
CHAPTER 5
SUMMARY, CONCLUSION AND RECOMMENDATIONS
This chapter concludes and a summary of the research is presented; the conclusion and
recommendations of the study are made. Recommendations for further research are at the
end the chapter.
5.1. Summary of findings

The main objective of the study was to examine the nature of the relationship that exist
between agricultural exports and foreign exchange reserves of Eswatini during the period
between 1990 and 2020.This was achieved through the following specific objectives:
1. Estimated selected descriptive statistics of the variables.

2. Determined the trend of the determinants of Eswatini‘s foreign exchange reserves
and its predictor variables for the past 31 years.
3. Estimated the elasticity of Eswatini‘s foreign exchange reserves and its predictor
variables
This paper therefore investigates the effects of agricultural exports on the foreign
exchange reserves. The study also attempts to measure the determinants or drivers of
foreign exchange reserves in Eswatini, a subject that has been largely ignored in the
literature. On a lower level, this study helped in identifying the macroeconomic variables
that affect the levels of foreign exchange reserves such that the policy makers could pay
attention to those variables to in an effort to increase Eswatini’s foreign exchange
reserves.
This study is primarily quantitative in nature and it utilized data from different sources for
the predictor variables of Eswatini’s foreign exchange reserves. EViews was used to
analyse the data. The data used in the study was based on Eswatini agricultural exports to
the rest of the world. The study used the autoregressive distributed lag model to analyse
the effects of Eswatini agricultural exports on foreign exchange reserves.
According to the ARDL model results, table 4.7 depicts coefficients such as exchange
rates, GDP per Capita, Lg net foreign assets and Lg SACU Receipts are significant at 1
percent and 10 percent in the short-run and in the long run. agriculture exports and money
supply to GDP affect foreign exchange reserves only in the long run. This means that
these economic indicators can be used to influence foreign exchange reserves only in the
long run. The Error Correction model was also highly significant at 1 percent.
44
The R-squared in the model is 0.9495 which means that the model explains 95 percent of
the total variation of Eswatini’s foreign exchange reserves. The study was mainly centred
around foreign exchange reserves and agricultural exports, but more other variables were
included based on literature to ensure that the model is stable and the regression for the
variables has enough controls.
5.2. Conclusions
The study finds that exchange rates have a positive effect on foreign exchange reserves
both in the short and in the long-run. This means that as exchange rates increase (currency
depreciation) foreign exchange reserves increase also. This is because if Lilangeni
depreciates Eswatini exports become more cheaper hence increasing the demand for the
goods from Eswatini which then leads to an increase in the volume of exports demanded
resulting to increase in foreign exchange reserves of Eswatini.
There is a negative relationship between net foreign assets and foreign exchange reserves
in the short-run. However, the relationship between net foreign assets and foreign
exchange reserves becomes positive in the long-run. This is because through these foreign
assets there are remittances in foreign currency which are received by the domestic
economy, this then leads to an increase in foreign exchange reserves in the long-run.
SACU receipts on the other hand have a positive relationship with foreign exchange
reserves in the short-run and the long-run, this is because SACU receipts are in South
African Rands hence increasing foreign exchange reserves.
Agricultural exports have no significant relationship with foreign exchange reserves in the
short -run, whilst they have a positive relationship with foreign exchange reserves in the
long-run. This is because as more agricultural goods are exported, more foreign currency
is received hence increasing the foreign reserves balance of Eswatini. External debt to
GDP Ratio and GDP per Capita were found to be an insignificant both in the short and in
the long-run.
Based on the statistical analysis and testing all necessary assumptions the study adopts the
alternative hypothesis that there is a positive relationship between agricultural exports and
foreign exchange reserves at 95 significance level.
5.3. Recommendations
Eswatini economy remains highly dependent on its export sector which is relatively
dependent on agricultural products such as; beef, sugar, forestry and citrus fruits. Based
on the fact that the study found a positive relationship between agricultural exports and
foreign exchange reserves in the long-run. The study therefore recommends that Eswatini
45
should increase its production on agricultural products in order to increase its agricultural
exports and boost its foreign exchange reserves. This also means that the government
should increase its support to farmers together with the private sector to stimulate
agricultural production and thus increase the volume of agricultural products as well. The
assistance can be in the form of the provision of irrigation facilities to ensure that farmers
are able to get returns even in instances where the rainfall was not enough for that
particular year, given that the rainfall of Eswatini is unreliable. The government should
also diversify its exports mostly the agricultural exports to maximise its gains from trade.
This can also help in improving the trade balance of Eswatini, since it will increase the
exports of Eswatini hence improving the foreign exchange reserves of the country as well.
Exchange rates have a positive relationship with exchange reserves in the long-run. This
implies that as the Eswatini Lilangeni depreciates foreign exchange reserves increase.
Based on this finding the study recommends that the Central Bank should closely monitor
the exchange rate regime and take advantage of instances where the Lilangeni depreciates
in order to improve the country reserve position. Such initiatives could be through
conducting forecasts of the exchange rate regime and then advise traders to trade more in
instances where the Swazi Lilangeni is expected to depreciate with the intension of
improving the foreign exchange reserves of Eswatini.
The study also found money supply that there is a positive relationship between money
supply and foreign exchange reserves. This means that an increase in money supply leads
to an increase in foreign exchange reserves. The study therefore recommends that the
Central bank of Eswatini should use money supply instruments to increase foreign
exchange reserves, however it is worth mentioning that the Central bank should also be
cognoscenti of the fact that increases in money supply can lead to increase in inflation, it
is therefore important to strike the balance while trying to improve the country’s reserve
position using money supply instruments.
The study also found that net foreign assets have a positive relationship with foreign
exchange reserves, which means that an increase in the value of foreign assets leads to an
increase in foreign exchange reserves. The study therefore recommends that Eswatini
should increase its foreign asset in order to improve the country reserve position.
However, it is worth mentioning that the country should mainly focus on increasing
investments on viable investments to reduce the risk of losses.
It is also worth mentioning that Eswatini has benefited from being a member of SACU
through the SACU receipts that are essential in financing the government obligations.
46
According to the study results there is positive relationship between SACU receipts and
foreign exchange reserves in the short and long-run. This therefore means government
should therefore implement policies that promote intra-SACU trade to maximise the
SACU receipts and thus improve the foreign exchange reserves of Eswatini.
5.4. Recommendations for further study

Future research should be focused on finding a causal relationship between agricultural
exports and economic growth in Eswatini. It is also recommended that future research
include other macroeconomic indicators (such as employment rate, taxation level, interest
rates, government expenditure, and foreign direct investment), since these variables may
assist in explaining the economy growth patterns of Eswatini,
47
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APPENDIX
Multicollinearity Test Results
Variable Centred VIF

Agric _Exports 7.1512
Exchange Rates 2.0095
External Debt 3.6126
Foreign Reserves 7.7281
GDP per Capita 2.8617
Money Supply 1.5216
Trade Openness 3.3137
SACU Receipts 2.9928
Lag Selection
Akaike Information Criteria (top 20 models)

-1.14
-1.16
-1.18
-1.20
-1.22
-1.24
-1.26
ARDL(1, 2, 0, 1, 0, 2, 1, 2)
ARDL(2, 2, 0, 1, 0, 2, 1, 2)
ARDL(1, 2, 0, 1, 0, 1, 1, 2)
ARDL(1, 2, 0, 0, 0, 2, 1, 2)
ARDL(1, 2, 1, 1, 0, 2, 1, 2)
ARDL(2, 2, 0, 0, 0, 2, 1, 2)
ARDL(1, 2, 0, 1, 0, 2, 2, 2)
ARDL(1, 2, 0, 2, 0, 2, 1, 2)
ARDL(1, 2, 0, 1, 1, 2, 1, 2)
ARDL(2, 2, 2, 2, 2, 2, 2, 2)
ARDL(2, 2, 0, 1, 0, 2, 2, 2)
ARDL(2, 2, 1, 1, 0, 2, 1, 2)
ARDL(2, 2, 1, 2, 0, 2, 2, 2)
ARDL(1, 2, 1, 1, 0, 2, 2, 2)
ARDL(2, 2, 0, 2, 0, 2, 1, 2)
ARDL(1, 2, 1, 1, 0, 1, 1, 2)
ARDL(2, 2, 0, 1, 1, 2, 1, 2)
ARDL(1, 2, 0, 1, 1, 1, 1, 2)
ARDL(1, 2, 1, 0, 0, 2, 1, 2)
Partial Autocorrelation ARDL(1, 2, 1, 2, 0, 2, 1, 2)
Date: 03/18/21 Time: 19:38
Sample (adjusted): 1992 2020
Q-statistic probabilities adjusted for 1 dynamic regressor
Autocorrelation Partial Correlation AC PAC Q-Stat Prob*
1 -0.226 -0.226 1.6407 0.200

2 -0.094 -0.153 1.9334 0.380
3 -0.225 -0.307 3.6899 0.297
4 -0.095 -0.304 4.0116 0.404
5 0.281 0.090 6.9692 0.223
6 -0.053 -0.083 7.0805 0.313
7 -0.068 -0.163 7.2682 0.401
8 -0.096 -0.125 7.6650 0.467
9 -0.019 -0.113 7.6805 0.567
10 0.088 -0.137 8.0437 0.625
11 0.104 0.010 8.5801 0.661
12 -0.103 -0.119 9.1360 0.691
*Probabilities may not be valid for this equation specification.
54

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THE EFFECTS OF AGRICULTURAL EXPORTS ON FOREIGN EXCHANGE

MBONGENI WELCOME SHONGWE

MBONGENI WELCOME SHONGWE (B.A. Soc. Scie)

A Thesis Submitted in Partial Fulfilment of the Requirements

for the Degree of MASTER OF SCIENCE

Dr. S.G. Dlamini, Supervisor Prof. A, Belete External Examiner

Dr. D.V. Dlamini, Co-supervisor

Copyright © Mbongeni Shongwe, 2021

SIGNATURE: M.W Shongwe

EXCHANGE RESERVES OF ESWATINI

Key words: Agricultural exports, Foreign Exchange

ABSTRACT ........................................................................................................................... III

TABLE OF CONTENTS ..................................................................................................... VI

LIST OF TABLES OF AND FIGURES .......................................................................... VIII

CHAPTER 1 - INTRODUCTION .......................................................................................... 1

1.1. Background and Setting .............................................................................................. 1

2.1. Theoretical Literature ................................................................................................ 13

3.1. Introduction ............................................................................................................... 27

4.1. Descriptive Statistics ................................................................................................. 32

5.1. Summary of findings ................................................................................................. 44

Table 1:1 Quarterly Exports Growth Rates of Eswatini ...................................................... 3

CBE Central Bank of Eswatini

REER Real effective exchange rate

USA United States of America

1.1. Background and Setting

Countries use different amount of resources to produce goods depending on the

Overview of Eswatini Trade

Composition of Eswatini Exports

1 Republic of -23% -5% 21% 11% -19% -27%

1 Republic -16% 7% 8% 9% -16% -23%

Exports and Imports by Trade Partner

Source: Eswatini Revenue Trade Database 2020

Trend Export Value and Import Value of Eswatini

Exports Growth Rates Imports Growth Rates

Figure 0.1 The of Exports and Imports in the past 11 years

Figure 0.2 Eswatini Trade Openness for the period 1990-2020

Export Import Ratio

Exports Imports Trade balance

Figure 0.4 Exports, Imports and Trade Balance Overview

Overview on Foreign Exchange Reserves

7,000 6,171 3.0

Figure 0.5 Quarterly Overview of Foreign Exchange Reserves

1.2. Problem Statement

1.3. Objectives of the Study

The specific objectives of the study were to:

H0: There is no significant no relationship between agricultural exports and foreign

1.5. Significance of the Study

1.7. Definition of Terms

1. Domestic credit: refers to lending or credit that a country or territory's central

1.8. Chapter Summary

2.1. Theoretical Literature

2.1.1. Overview on trade theories

2.1.1.1. Mercantilism Trade Theory and Imports

2.1.1.1.1 Limitations of the Mercantilism Theory

2.1.1.2. Adam Smith’s Absolute Advantage and Imports

2.1.1.3. The Ricardian Comparative Advantage and Imports

2.1.1.3.1 Limitations of the Ricardian theory

2.1.1.4. Heckscher-Ohlin Theory and Imports

2.1.1.4.1 Limitations of the Heckscher-Ohlin Theory

1. Nations do not initiate trade: this is done by individuals or

Theoretical Literature on Foreign Exchange Reserves

2.2. Empirical Literature

Agricultural exports play a significant role in the economy of Ethopia, it is therefore

Notes: ; ; denote significance at 10%, 5% and 1% respectively

Notes: ; ; denote significance at 10%, 5% and 1% respectively