Alternative Exchange Rate Strategies and Fiscal Performance in Sub-Saharan Africa
This paper investigates the relationship between fiscal performance in 28 sub-Saharan African countries over the 1980-91 period with movements in the exchange rates, the terms of trade, and other macroeconomic aggregates. It finds that the tax base in most of these countries is heavily dependent on imports and import substitutes. Consequently, an overvaluation of the exchange rate in countries which adopted a fixed exchange rate strategy undermines the tax base and results in a widening of the fiscal deficit when the purpose of the strategy is to restore the real exchange rate to its equilibrium through fiscal contraction. Those countries which pursued a variable exchange rate strategy failed in attaining price stability, but exchange rate adjustment was critical in contributing to other macroeconomic objectives, particularly fiscal balance, competitiveness, and growth.
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91 As percent adjustment strategy Africa fiscal data average Botswana and Nigeria central banks CFA franc zone CHART competitiveness Congo Côte d'Ivoire Countries Excluding Natural country groups currency current expenditures decade decline in terms deterioration direct taxes effective exchange rate Exchange Rate Countries Excluding Botswana Excluding Cameroon Excluding Grants Excluding Natural Resource export prices external shocks FER countries fiscal balance fiscal data base fiscal deficit fiscal performance Fixed Exchange Rate French franc Gabon Gambia GDP deflator Ghana government revenue groups of countries imbalance import substitutes import unit values income inflation informal sector investment macroeconomic monetary unions Natural Resource Exporters nontax revenue nontraded percent of GDP points of GDP Rate Countries Excluding Real Effective Exchange real exchange rate reduced relation to GDP sales taxes second half seigniorage Sub-Saharan Africa fiscal Tanzania tariff tax base tax revenue taxation terms of trade total revenue traded goods sector Variable Exchange Rate wage bill Zaire