Impact of Exchange Rate Volatility on Economic Growth: An Empirical Evidence from South Sudan

The prime objective of this study is to examine the impact of exchange rate volatility on economic growth in South Sudan, starting from 2008 to 2022, constructed on the basis of monthly time series. The exchange rate is the value of domestic currency convertible in terms of another currency or currency. The degree and trend of fluctuation of exchange rate influences internal and external shocks for both developed and developing economies. The study used the autoregressive (VAR) model to analyze the data due to its effectiveness, flexibility and simplicity in investigating multiple time series datasets. RGDP is the dependent variable, and EXR, EXP, IMP, INF, FDI, and UNEMPR are independent variables, respectively. The study tested the stationarity of time series using the Augmented Dickey-Fuller (ADF) test. Thus, most of the variables indicated stationarity in the first difference with intercept and at a 1% level of significance, except the exchange rate that becomes stationary in the second difference and at a 1% level of significance. In addition, a Pairwise Granger causality test has been applied to explore the relationships between variables in the future; the results portrayed a unidirectional Granger causality between imports (EXP) and exports (IMP) at 0.0567, suggesting that fluctuation in imports influences the pathway of export trends. However, the empirical result of this study concluded that the exchange rate has a negative impact on economic growth, disclosing a coefficient of -0.249154 that implies a 1-unit increase in the exchange rate is linked with a decrease of about 0.249154 units in the real gross domestic product (RGDP) and at a 1% level of significance. The depreciation of a local currency rises the prices of imported goods and services, and leads to imported inflation. The scarcity of the U.S. dollar sets a burden on the exchange rate and weakens the aggregation of the official exchange rate in the country. This worsens economic progress and drives the economy into an absolute verge of collapse, exposing consumers to poverty, that in turn, to a higher unemployment rate, poor living standard, health care, education, as well as derailing apart the foreign direct investment inflows in South Sudan. The study suggests that the government should diversify exports and adopt macroeconomic policies that are geared towards addressing inflationary pressures and stabilizing the domestic currency.