Exchange reform, parallel markets, and inflation in Africa: the case of Ghana

Ajay Chhibber and Nemat Shafik

No 427, Policy Research Working Paper Series from The World Bank

Abstract: This paper presents a theoretical framework to analyze the issue of exchange rate reform in the presence of parallel markets. In Ghana, which has carried out one of the most thorough structural adjustment programs in Africa, an increasingly high inflation rate has been attributed to major devaluations of the official exchange rate. The authors dispute this conclusion based on careful testing and simulations using a macroeconomic model estimated with Ghanaian data. This model also shows that there is no direct relationship between the official exchange rate and inflation. The results also show that official devaluation had a postive effect on Ghana's budget. Revenue improvements came from three channels: the higher grant aid disbursed at a more depreciated exchange rate, a reduction in the subsidies that had accrued to importers through an overvalued exchange rate, and an increase in export taxes as cocoa farmers increasingly marketed their output through official channels. The official devaluation therefore did not produce higher budget deficits, demand pressure did not spill onto the parallel market, and the exchange premium narrowed considerably. The key to the success of the program was the adequate level of foreign financing, combined with a coherent set of fiscal policies.

Keywords: Access to Markets; Economic Theory&Research; Environmental Economics&Policies; Economic Stabilization; Markets and Market Access (search for similar items in EconPapers)
Date: 1990-05-31
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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