The Impact of Devaluation on Trade Balance in the Sudanese Context

Abstract

The majority of developing economies endeavor to achieve a trade surplus by increasing exports over imports. Devaluation is regarded as one way for a country to achieve trade surplus, specifically by increasing the price of imports in the domestic country while reducing that of exports. The purpose of this chapter is to identify the primary economic variables that impact the trade balance of Sudan. Particularly, it discusses how Sudan’s bilateral trade balance was impacted by exchange rate changes, income, and supply of money between 1970 and 2020. To investigate how currency devaluation impacted Sudan’s trade balance with its primary partners, a cointegration approach and error correction method were used to develop the empirical model for this study. According to the bounds test, the variables of interest are interwoven in the long-run. The significance of the associated equilibrium correction supports the presence of a long-run relationship. Furthermore, variance decomposition was implemented to examine the dynamic interactions of the variables included in the estimated model. According to the results of the variance decomposition, innovations in foreign income are a major contributing factor in the forecast error variance of the trade balance in the short-run. By contrast, in comparison with other variables, the domestic money supply is highly influential on trade balance in the long-run. One of the key findings of this study indicates that the devaluation of Sudan’s currency does not represent substantial progress toward enhancing the status of its trade balance.