Exchange rate volatility and agricultural trade under policy reforms in South Africa

Abstract

Decades of government intervention have helped develop the South African agriculture sector to its present state. Policy reforms have included trade and exchange rate policies to increase the country's international competitiveness, reduce poverty and promote economic growth. These reforms are facilitating the growth in agricultural trade and South Africa's reintegration into the global economy. Annual agricultural exports and imports have increased. This paper uses annual data and a vector error-correction model to investigate the supply and demand relationships for agricultural trade flows in South Africa during the past four decades. The results show that prices, real exchange rates, domestic production capacity and real incomes have significant impacts on the country's agricultural trade. In particular, exchange rate volatility has negative impacts. This cannot be viewed solely as an exogenous source of macroeconomic instability in South Africa, as domestic policies play a crucial role in influencing the movement of exchange rates.

Acknowledgments

The comments and suggestions on earlier versions of the paper by Dr PJ Nomathemba Seme, Siphokazi Kargbo, the editor Caroline Kihato and anonymous journal referees are very much appreciated. The author's sincere thanks also go to various staff members at the South African Mission to the IMF/World Bank in Washington, DC, the National Department of Agriculture, Statistics South Africa, and the South African Reserve Bank for providing some of the data and materials used in this paper. The views expressed herein do not reflect the official position of Ameriprise Financial or its affiliates. The author accepts sole responsibility for any errors and omissions.