Exchange rate drivers in Sub-Saharan African low and lower-middle income countries (LLMICs) are not widely researched, despite being distinctly different from those in more advanced markets. A better understanding will support these countries in attracting external financing and bridging the large financing gap in local currency.

A STAREBEI research grant with the University of Leeds presented in March 2022 at the EIB sheds light on these drivers and provides valuable insights that can be used for the Bank’s lending operations.

In recent years the region has seen a significant albeit difficult move towards floating exchange rates. Exchange rate dynamics are often shaped by an export concentration in a limited set of mineral and/or food commodities and a high sensitivity to foreign financial flows and international market conditions. A key difference with more advanced countries is the particular microstructure of these foreign exchange markets, which turns out to play an important role in shaping their dynamics

The results of a working paper reveal that most case study countries have functioning foreign exchange interbank markets but that they are often characterised by volatile and “lumpy” liquidity, which can lead to Foreign exchange (FX) hoarding and provides those with access to FX with significant market power.

In a second working paper, these microstructural results are complemented by an econometric investigation of the determinants of the exchange rate, its volatility, and crash risk in 15 African LLMICs. The investigation confirms the importance of the productive and export structures and of institutional factors The results also point to the potential risks arising from climate crises, and the rising importance of financial factors for African LLMICs exchange rates.

STAREBEI (STAges de REcherche BEI-EIB research internships) is a programme that provides grants to universities in order to finance junior researchers carrying out research projects proposed by the EIB Group (EIB and EIF) under the joint supervision of a university tutor and an EIB or EIF co-tutor. To date, 65 young researchers from 41 universities in 14 European countries have benefited from the STAREBEI programme.