Analysing the impact of the external debt on real exchange rate in Namibia
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Date
2022
Authors
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Publisher
University of Namibia
Abstract
The relationship between external debt and real exchange rate is multifaceted. Namibia is not
excluded from this spectacle as concerns are escalating about the fast-increasing of external
debt and its implication on the real exchange rate in the long run. However, counter arguments
accentuate that ifforeign borrowing is for stimulating economic growth via increased economic
earnings, then external debt growth might not pose a problem to the economy.
This study examined the impact of external debt on real exchange rate in Namibia using annual
time series for the period 1990 to 2019. The study employed a time series econometric model
to examine the nature of the relationship that exists between external debt and real exchange
rate. The augmented Dickey-Fuller (ADF) test was utilized in testing the unit root
characteristics of the series and to determine the order of integration. All variables with the
exception of debt service payment were found to be non-stationary in levels but became
stationary at their first differences. The autoregressive distributed lag (ARDL) cointegration
framework was also employed to determine whether there is a long run relationship among the
variables. The ARDL bounds test results confirm the presence of a long run relationship among
the variables. The empirical evidence show that an increase in external debt appreciates the
real exchange rate while real money supply, lagged debt service payment, foreign reserves and
real income depreciates the real exchange rate. However, real income, and foreign reserves
only depreciates the real exchange rate in a short run. External debt and real money supply are
the only variables that significantly impact the real exchange rate both in a long run and short
run. This indicates that both external debt and real money supply partially drives the real
exchange rate in Namibia. Thus, the implication of these results for the Namibian Government
is that, since borrowing secures much-needed funds to aid development, a hefty external debt
load can also impact real exchange rate which will ultimately dampen economic growth
Description
A thesis submitted in partial fulfilment of the requirements for the Degree of Master of Science in Development Finance
Keywords
External debt, Real exchange rate, Namibia, University of Namibia