Effect of Exchange Rate Fluctuations and Economic Performance in East African Countries

Abstract

This research project sought to examine the effect of exchange rate fluctuations on economic performance of East African countries from the year 2003 to 2022. In the recent years, the East African region has experienced significant economic progress and according to African Development Bank’s economic outlook report, this is the only region in Africa that managed to escape recession during Covid-19 pandemic. However, due to some global shocks attributed to international supply chain, the study examined the interrelationship between the macroeconomic variables. This research was influenced by Purchasing Power Parity theory, Interest Rate Parity theory, and Rational Expectation theory. Descriptive research design was employed. The study population was all the East African countries, and five sample countries were selected. Secondary data was collected from World bank, other reliable sources such as Federal Reserve Bank of St. Louis. The study employed Vector autoregression (VAR) model to gain each specific insight amongst the variables. The results confirmed the interconnectedness between the study variables where each study variable is Granger caused by overall variables when analyzed concurrently all together, with significant p-values less than 0.05, p<0.05. This suggested that overall variables concurrently predict each study variable. The study results discussed both the convergent and divergent views on the study results in comparison with the empirical studies, the findings suggested the alignment of the study theories and the repercussions of study variables on their interconnectedness. The correlation and predictive power of exchange rate on study variables provides clear evidence of the impact of exchange rate on economic performance that the stable exchange rate boosts economic performance. The study recommendations are meant for the governments, central banks of East African countries and policy formulators on contribution to the development and enhancing the strategies to ensure favorable macroeconomic policies.