Exchange Rate And Performance Of The Manufacturing Sector In Ghana: Evidence From Nonlinear Ardl Analysis

Abstract

Stabilizing the exchange rate in Ghana has been a major concern. This study examined the effect of exchange rate appreciation and depreciation on the performance of the manufacturing sector in Ghana. Again, it investigated whether there exists an asymmetric relation between the exchange rate and manufacturing performance in Ghana. This study employed non-linear autoregressive distributed lags to examine the purpose of the study. The results from the NARDL models indicate that, on average, both appreciation and depreciation of the exchange rate and Gross Fixed Capital Formation (investment) are significant determinants of the performance of the manufacturing sector in Ghana in the long run. From the short-run estimates, the linear and nonlinear ARDL models revealed that the real effective exchange rate, inflation rate, gross fixed capital formation, and labor force participation influence the manufacturing sector. The results confirm the presence of asymmetric relationships between the exchange rate and manufacturing output in Ghana. The effect of appreciation of the currency is more than that of depreciation. In view of this, it is recommended that the central bank and the government, through the Ministry of Finance should ensure stabilization of the currency by abolishing the of use of foreign currency to trade in Ghana. Again, some more restrictive measures such as increases in import duties and tariffs should be put in place for goods and services that could be locally produced so as to reduce the pressure on the demand for foreign currency.