The Impact of Exchange Rate Policy on the Balance of Payments in Algeria: 1970-2004

Sumayya Zerar, Bashir Al-Zu’bi, Taleb Awad

Abstract


The study focused on the impact of exchange rate on the current account balance of payments in Algeria during the period 1970-2004. It analyzed the various development phases of the exchange rate. It also analyzed the capital account, the balance of trade and the scale of economic openness. In addition, econometric techniques were used to estimate the demand on exports, the demand on imports and the current account using the Fully-Modified OLS method. The Fully-Modified OLS method is used in analyzing the impact of exchange rate changes on the balance of payments in Algeria, because this method is known for its ability to solve both bias and autocorrelation problems.

Empirical analysis estimated the long elasticity of exports with respect to exchange rate to be (1.529), and with respect to the income to be (0.123). The imports elasticity values with respect to exchange rate and income were (0.217) and (0.773), respectively. However, the national income and the foreign income were neutral regarding the current account. Finally, the devaluation of the Algerian Dinar may help increasing exports and improving the current account only in the short run.

According to the findings of the study, production diversity and quality improvement are needed to enhance Algeria’s economic competitiveness. This can attract global demand to Algerian products and encourage non-oil exports which are more price elastic

Keywords


Exchange Rate, Balance of Payments, Algeria

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