Abstract
The study conducts an investigation that seeks to evaluate the nature of exchange rate pass-through on consumer prices for Eswatini (formerly known as Swaziland). As a small, open economy, the country is susceptible to exogenous shocks. The exchange rate acts as a medium through which ii external shocks get transmitted to the real economy. These shocks are expected to be mitigated through the Common Monetary Area arrangement with South Africa and other member countries. However, there is limited evidence regarding the effectiveness of the Common Monetary Area arrangement in mitigating exchange rate costs, and it is non-existent in the case of Eswatini. The study was guided by the Johansen cointegration methodology to analyse the dynamic link between the Consumer Price Index, the exchange rate and Gross Domestic Product, utilizing time series data from 1989 to 2018. The cointegration test confirmed the presence of a long-term relationship in the model. Results show incomplete exchange rate pass-through, in which a one per cent increase in the exchange rate would increase the consumer price index by about 0.43 per cent in the long run. In addition, Eswatini’s gross domestic product is negatively related to the consumer price index. Granger causality tests that are based on the Vector Error Correction Model, show a unidirectional causality moving along from the exchange rate to the consumer price index in Eswatini. These results imply that the country’s exchange rate pass-through is relatively higher than its domestic prices. To mitigate the impact of exchange rate pass-through, Eswatini monetary authorities should establish a partial monetary policy such as a required reserve, credit control, and open market operations. Local demand should be managed, and supply challenges should be addressed.
M.Phil. (Industrial Policy)