The Impact of Currency Depreciation on Exports of SAARC Countries

Abstract

Conventionally, it is believed that decline in value of currency tends to improve exports due to relatively cheaper items making imports expensive specifically for developing economies. Hence, the aim of the study is to investigate the impact of currency depreciation on exports of SAARC countries from 1981 to 2017 using panel ARDL and ECM techniques. Correspondingly, four SAARC countries-Bangladesh, India, Pakistan, and Sri Lanka have been selected employing the data of real effective exchange rate, exports, inflation, and gross capital formation. The panel ARDL model has approved an inverse association of currency depreciation with exports in the long run and significant implication of ECM in the short run. The estimated findings have pointed towards the prevailing circumstances at both regional and country level. An inelastic nature of exportable products; lack of market diversification, confinement of domestic demand in international markets; and limited regional integration among SAARC economies are the prominent attributes of deteriorating exports. Precisely, these elements restrict the economies to bear the fruits of currency depreciation. It is concluded that SAARC economies have the potential to enhance their exports as these virtually exhibit same production patterns; and divergent comparative advantages. It is thus essential for the countries to cope up with inter and intra-regional risks and issues immediately in order to grab wider global economic prospects through enhancing exports competitiveness. Contribution/ Originality: The study contributes in the literature while providing the implication of currency depreciation on exports of selected economies of SAARC region. The estimated value of real effective exchange rate has been found to exert indirect pressure on exports which proves that depreciation reduces the export growth in South Asian region. 1. INTRODUCTION In today's globalized era, the impact of exchange rate on exports has grabbed the attention of economists, and policymakers. This nexus is considered significant in sundry of emerging and developing economies as exports in these economies are considered central for growth and development (Alege and Osabuohien, 2015).This could be attributed to an increase in emphasis on export-led growth with minimum trade restrictions and rapid liberalization in economies. Thus, a well mix of these strategies would assess to bear the advantages of exchange rate swings with more capital formation (Koirala, 2018). On the other side, it is also a well-established outlook that an increase in

The Impact of Currency Depreciation on Exports: An Autoregressive Distributed Lag Approach for Turkish Lira

“…The panel ARDL http://www.ae.ef.unibl.org/ model revealed a reverse relationship between the currency depreciation and exports in the long run, as well as a significant role for ECM in the short run. Contrary to Kumar, Begam & Nargis (2020), Alemu & Lee (2014) found no evidence for the effect of depreciation to improve trade balance for 14 Asian economies.…”

“…They accepted that exchange rate changes will have a significant negative impact on exports in both short and long term. Kumar, Begam & Nargis (2020) examined the impact of currency depreciation on exports of SAARC countries -Bangladesh, India, Pakistan and Sri Lanka from 1981 to 2017. The panel ARDL http://www.ae.ef.unibl.org/ model revealed a reverse relationship between the currency depreciation and exports in the long run, as well as a significant role for ECM in the short run.…”

Effects of real effective exchange rate volatility on export earnings in Ethiopia: Symmetric and asymmetric effect analysis

“…[ 77 ] from Asia shows that exchange rate volatility has no effect on exports. Besides this [ 78 ], also find an inelastic response of commodity exports to exchange rate depreciation in SAARC countries [ 79 ] also examined the effect of exchange rate volatility in Mexico, Indonesia, Nigeria, and Turkey. They predicted volatility using the GARCH model and employed ARDL to estimate the long- and short-run effects.…”