Exchange Rate, Non-Performing Loans and Economic Growth in Africa

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October, 2016
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The existing controversy in literature surrounding depreciation of exchange rate is whether it is contractionary or expansionary to economic growth and also the fact that nonperforming loan is believed in literature to contract growth necessitated this study as Africa is in tabulate time. As currencies in Africa continue to depreciate against major currencies and nonperforming loan is also on a high side. Therefore, this study was mainly to examine empirically what effect does the interaction term (nonperforming loan and exchange rate) has on economic growth. Using 15 countries in Africa with data spanning from 2002-2014 with the aid system GMM estimator, the following findings were drawn. The results show that exchange rate, nonperforming loan and the interaction term, all have contractionary impact on economic growth in Africa. Also, the study reveals that exchange rate, inflation, economic growth, and unemployment are significant factors that determine nonperforming loans in Africa. The study proposes that in Africa exchange rate depreciation passes through nonperforming loan to retard economic growth. Therefore, Africa authorities (fiscal and monetary) should anchor policy around exchange rate with precision, this will stabilize the economy and banking assets quality shocks. In addition, in the implementation of Basel II or III requirements of credit assessment process, this study suggests that banks should take into account the level of economic activity (real GDP) when granting loans.
A thesis submitted to the School of Graduate Studies, Kwame Nkrumah University of Science and Technology in partial fulfillment of the requirements for the award of the Degree of Master of Science in Economics, (Money, Banking and Finance Option).