Foreign Exchange Rate and GDP Growth Vis-À-Vis Trade Balance in Sub-Saharan Africa

Abstract

We investigate the interaction effect of foreign exchange rate and economic growth on the trade balance in Sub-Saharan Africa (SSA). We utilize balanced annual panel data for 20 SSA countries covering the period 2005 to 2024. We source the data from the World Development Indicators. We employ the Generalized Method of Moments (GMM) estimator to address endogeneity, dynamic effects, and unobserved country-specific heterogeneity. Empirical results reveal a negative and statistically significant interaction between foreign exchange rate and GDP growth. Specifically, the estimated coefficient of the interaction term (FER*GDP) of -0.190271 implies that a simultaneous 10 percent increase in exchange rate and GDP growth is associated with a deterioration of the trade balance by approximately 1.9 percent. These findings indicate that economic growth occurring alongside exchange rate depreciation is linked to weaker trade balance outcomes, consistent with import-intensive growth structures and limited export supply responsiveness in SSA economies. These results highlight the importance of accounting for structural characteristics when assessing trade balance effects of exchange rate movements and growth dynamics.