An Analytical Research on the Determinants of the

Sudanese Exchange Rate

Introduction
One of the macroeconomic indicators is the exchange rate, which is subject to a
variety of economic and political factors and variables. Therefore, the monetary
authorities pay great attention to exchange rate policies, especially in countries that
suffer from a scarcity of their foreign currency resources, given that the strength and
stability of the national economy of any country are closely linked to the exchange
rate of its currency. The national currency against other foreign currencies and the
exchange rate are affected by multiple economic and political factors, and among
these economic factors to be studied in this paper are inflation, exports, real gross
domestic product, and foreign direct investment. Therefore, the study attempts to
examine the relationship between these factors as independent variables and the
exchange rate as a dependent variable on the one hand and the impact of these
variables on the exchange rate on the other hand, and to analyse these factors to reach
results, develop some suggestions and present them to the competent authorities to
contribute to solving the problem. In Sudan, where the economy is subject to various
internal and external pressures, the need to understand and predict exchange rate
movements is particularly acute.

Objectives of the study

Acquire knowledge regarding the exchange and its workings. An investigation is
being conducted to examine the relationship between inflation, exports, gross
domestic product, and foreign direct investment as independent variables and the
exchange rate as a dependent variable. The aim is to assess the impact of inflation,
exports, gross domestic product, and foreign direct investment on the exchange rate.
The goal is to construct a measurement model that identifies the most significant
variables influencing the exchange rate.

Significance of the Study

This study aims to provide a comprehensive analysis of the exchange rate and its
influencing elements, addressing the lack of scientific research in this area.
Additionally, it seeks to contribute valuable scientific content to the existing body of
knowledge on the exchange rate. Fluctuations in exchange rates affect the value of the
national currency, which in turn affects the overall economic performance of the
country, both domestically and internationally. The empirical analysis is crucial as it
determines the impact of inflation, export volume, gross domestic product, and
foreign direct investment on the exchange rate using estimated standard relationships.
This provides precise quantitative mathematical outcomes that are utilize to offer
ideas and recommendations to individuals responsible for monetary policy with the
aim of reducing inflation. It will also suggest areas for future research, such as the
impact of political stability on exchange rate dynamics or the role of international
trade agreements.

Research Questions
The problem of the study is that the Sudanese economy since the 1980s has constantly
suffered from fluctuations in the exchange rate and that there have been efforts made
by the state to develop policies and make decisions to address fluctuations in
exchange rates and stabilize them, but those efforts until 2019 were not crowned with
success. The problem of the study also lies in trying to answer the following
questions:
1. What is the nature of the relationship between foreign direct investment and the
exchange rate?
2. How do these determinants affect exchange rates in the short-term and long-term?
3. How effective are the current monetary policies in controlling exchange rate
volatility?
4. What is the impact of inflation, exports, gross domestic product, and foreign direct
investment on the exchange rate of the Sudanese pound?

Literature Review
This literature review provides an in-depth analysis of various studies conducted from
1957 to 2019 on the determinants of exchange rates in Sudan. It highlights the
evolution of research methodologies and the growing complexity in understanding the
relationship between exchange rate movements and macroeconomic variables.
Initially, studies like the 2005 research focused on fundamental elements like general
prices, money supply, and balance of payments, excluding GDP due to its minimal
impact. Jabara Allah’s 2013 study expanded this understanding, emphasizing the role
of exports, money supply, and GDP, especially under economic liberalization since
1996. Adam’s 2014 research further broadened the scope by using a multi-period
regression analysis to include various variables such as exports, imports, and foreign
investment. Subsequent studies continued to evolve in methodology and insights.
Muhammad’s 2015 study explored the indirect effects of the exchange rate on
inflation, emphasizing the disconnected of economic factors. The Study Net in 2018
and Ahmed’s 2012 study highlighted the inverse relationship between the exchange
rate and variables like inflation and foreign capital flow, and the direct relationship
with exports, respectively. Babiker’s 2014 study introduced co-integration and error
correction models, emphasizing the importance of short-term fluctuations and long-
term trends in exchange rate analysis. Yamina’s 2011 research provided insights into
the immediate impacts of monetary policy changes on exchange rates in the Arab
Maghreb countries. The most recent study, covering 1999 to 2019, marked a
significant methodological advancement by employing the Autoregressive Distributed
Lag (ARDL) model. This approach allowed for a more nuanced understanding of
exchange rate determinants, accounting for both immediate and delayed effects of
various economic variables during a period of significant economic instability and
policy shifts in Sudan. In conclusion, this review underscores a rich and evolving
understanding of exchange rate determinants in Sudan, highlighting the influence of
variables like money supply, inflation, and GDP. The various methodologies and
findings across these studies provide valuable insights for policymakers and
economists in formulating strategies to stabilize the exchange rate and promote
economic growth in Sudan, reflecting the continuous evolution and expanding scope
of research in this field.

Research Design and Methodology

Econometric Models and Techniques: The study will primarily utilize the Auto
regressive Distributed Lag (ARDL) model and the Vector Error Correction Model
(VECM). These models are particularly effective in analyzing non-stationary time
series data, which is common in economic studies.
 ARDL Model: This model is suitable for understanding the long-term
equilibrium relationships between variables while also capturing short-term
dynamics. Its flexibility in handling different integration orders of variables
 makes it ideal for this study.
 VECM: This model is particularly useful in studying the speed of adjustment
towards long-term equilibrium after short-term shocks. It is relevant for
understanding how quickly and effectively the exchange rate in Sudan responds
to changes in its determinants.
The methodology section will also discuss the statistical techniques for estimating and
validating these models, including unit root tests, cointegration tests, and error
correction mechanisms. The study relied on the use of the logarithmic formula in
order to obtain the elasticities of the independent variables, in addition to reducing the
dispersion of the data. The study relied on the Auto regressive Distributed Lag Model
(ARDL) methodology, which was presented by (Pesaran and Shin (2001). In this
methodology, auto regressive models and distributed lag models are combined into
one model, and thus the time series is a function of slowing down and slowing down
its values and the values of the current independent variables.

Data Collection and Procedures

The study relied on the (ARDL) methodology as it is one of the most appropriate
models with the size of the observations used, which amount to 21 observations
extending from the year 1999–2019 obtained from the Central Bureau of Statistics
and the Central Bank of Sudan. To complete the study's problem and achieve its
objectives, a measurement model was built that includes four variables : inflation,
exports, gross domestic product and foreign direct investment as independent
variables, and the exchange rate as a dependent variable. Therefore, the natural
logarithm was taken for all variables of the model, and thus the final formula of the
model to be estimated becomes as follows:
Log(ER)=β0 - β1Log(INF) + β2Log(XP) + β3Log(GDP) + β4Log(FDI) + Ui
Here,
 Logarithm of exports, Log (XP)
 Logarithm of exchange rate, Log (ER)
 Logarithm of Gross Domestic Product, Log (GDP)
 Logarithm of the inflation rate, Log (INF).
 Logarithm of Foreign Direct Investment, Log (FDI)
 The fixed term in the model: β4,β3,β2,β1
 Regression coefficients: β0
 Random error term (residuals): Ui
Recommendation & Conclusion
Following a contractionary monetary policy to reduce the inflation rate and achieve
exchange rate stability, because a low inflation rate inevitably leads to a decline in the
currency exchange rate against the Sudanese pound. They have to pay attention to
exports, develop them and diversify their structure because they represent the three
most important sources of foreign exchange. Increasing agricultural production due to
Sudan’s comparative advantages in agricultural production increases the gross
domestic product, which in turn leads to improving the exchange rate. Besides
attracting foreign capital by facilitating investment procedures and creating an
encouraging economic environment for it, as well as putting an end to the political
and security problems that threaten foreign investments in the country and
coordinating macroeconomic policies with each other.

References

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