Impact of devaluation on service sector exports in Saudi Arabia: non-linear ARDL approach

Abstract

Devaluation policy is considered as operative in raising the exports' performance in any country. This paper had investigated this issue in the non-linear Autoregressive Distributed Lag (ARDL) setting developed by Shin et al. (2014) to differentiate the devaluation and appreciation policy, and to verify symmetrical or asymmetrical effects. We investigated a period of 1970-2016 for the six major service sector exports of Saudi Arabia. In each model, world income, as well as positive and negative variables of exchange rate are independent variables. The exports of construction services (CONST), financial services (FIN), insurance services (INS), transport services (TRANS), telecommunication services (TELE), and travel and tourism services (TRAV) are dependent variables. We found the long run relationship in all service sector exports' models. Further, we have found that appreciation is responsible for depressing exports in 5 out of 6 sectors, and devaluation helps in raising exports in 4 out of 6 sectors in the long run. We have found the asymmetrical effects of devaluation and appreciation in 5 out of 6 sectors. In the symmetry analysis, the effects of positive and negative real ER variables are found to be asymmetrical in nature for all sectors except telecommunication sector. The effects of devaluation on the service sector exports are found elastic in the most part of service sectors than those of appreciation. Further, J-curve hypothesis has been validated in 3 out of 6 sectors (it means, in transport, telecommunication, and travel and tourism sectors). Based at the findings of the undertaken study, it is recommended to conduct the devaluation policy to raise service sector exports in Saudi Arabia in the context of the realised course on the diversification of the economy.

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