4.6. Results and discussion 102
4.6.5. Structural VAR estimation results for Gabon 133
4.6.5.1. Impulse response function analysis on Gabon 133
The sequence of analysis follows the same pattern as in the case of Nigerian and Algerian economies. We begin with the effect of oil price shocks on the system. Figure 4.19 shows the responses of selected variables in the monetary policy transmission mechanism to a one standard deviation oil price shock. As observed in the analysis of Nigeria and Algeria, a similar response of oil output growth rate to an oil price shock is also noticed.
The oil output first falls before it picks up sharply. Interest rates do not show a clear response to the oil price shock but the response is insignificant. The effect of the shock shows that the growth rate of money supply falls initially, becoming significant after six periods. Later, the money supply growth rate picks up gradually. The oil price shock triggers a sharp rise in the rate of inflation, which becomes significant in the seventh period. This shows that inflation might not be a result of changes in money supply. In response to the shock, manufacturing output falls initially but after the fourth period it starts rising.
Figure 4.19: Impulse responses to an oil price shock (Gabon)
This might be a result of the actions of the monetary authorities in stabilizing the exchange rate, since they practice a fixed exchange rate regime.
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Figure 4.20: Impulse responses to oil output growth rate shock (Gabon)
The shock from the oil output growth rate in Gabon and the responses from selected variables in the monetary policy transmission mechanism are shown in Figure 4.20. The shock causes interest rates to rise and money supply growth rate to rise initially and latter fall. The inflation rate rises while manufacturing output growth decreases in response to the oil output growth shock. It should be noted that the real exchange rate also falls, although the response is insignificant. The currency appreciation might have induced the fall in the manufacturing output. GDP growth rate rises initially and later
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falls gradually, beginning about the fifth period. The implication of this is that the Gabonese economy is highly susceptible to the negative effect of oil output growth.
World Bank (2012) emphasized that oil production shock in Gabon has been having a detrimental effect on growth in recent times which is attributed to dwindling oil reserves in the country. This has been making it difficult for the country to cope immediately with any increase in the global demand for oil.
Figure 4.21: Impulse responses to an interest rate shock (Gabon)
The interest rate shock has a major impact on the economy of Gabon as shown in Figure 4.21. Gabon is a member of a unified monetary zone called CEMAC (communaute economique et monetaire de l’ afrique centrale). Members of this monetary zone are
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Cameroun, Central African Republic, Chad, Congo (Brazzaville), Equatorial Guinea and Gabon. All these countries, except Central African Republic, are net oil exporters.
These countries are under one monetary system and a common central bank called BEAC. Whenever there is an increase in interest rates, it makes the Gabonese currency depreciate in real value (see Zafar, 2004; IMF, 2010; World Bank, 2012). The implication as noticed in the impulse response function is that an interest rate shock leads to a fall in money supply growth rate, inflation falls and manufacturing output growth rises initially at least up to the fourth period before falling. This might not be unconnected to the action of the monetary authority its effort to avoid the real exchange rate depreciation and will cause manufacturing output to fall as the period progresses.
GDP growth rate also falls initially before picking up, in response to the shock.
These results further justify the findings from Nigeria and Algeria that a currency appreciation is possibly going to have a detrimental effect on output growth of the manufacturing sector in an oil exporting country. However, currency depreciation will have a positive effect on manufacturing output. On the whole, interest rate shock appears not to have any positive effect on the manufacturing output in Gabon.
We also examine the impulse response to a money supply growth rate shock (see Figure 4.22). The responses are dictated by the fixed exchange rate system in Gabon. A money supply shock characterised by an increase in money supply might not have a positive influence on the manufacturing growth rate as a result of the pegged exchange rate.
Manufacturing output growth rate initially rises until the third period; then it starts falling, a process that goes on until the ninth period. Thereafter, it starts picking up.
This is an indication that expansionary monetary policy is not very effective in promoting growth under fixed exchange rates. The overvaluation resulting from the pegged exchange rate system does not seem to have a good result on the manufacturing output growth. The real exchange rate response which shows that the currency appreciates has a negative impact on the manufacturing output growth by causing it to fall sharply. Generally, the response of manufacturing output growth shows that it initially increases, then falls before rising again. But for most of the periods
manufacturing output is falling. Precisely out of the 12 periods, the manufacturing output falls between the second period and the tenth period. This fall can be associated with the currency that appreciates.
.Figure 4.22: Impulse responses to money supply growth shock (Gabon)
However, Gabon has benefited from the stable exchange rate in terms of internal economic stability; but the negative impact has been in the area of international trading as it discourages importation of goods used in the domestic manufacturing industry (Zafar, 2004). According to the World Bank (2010) the external reserve is used to maintain the fixed exchange rate. The monetary policy instruments in Gabon are usually used for maintaining economic stability in the face of the unrealistic exchange rate.
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Since the exchange rate is pegged, most often the economic stabilization effort works at variance to the growth of the non-oil sector, therefore limiting the effectiveness of monetary policy instruments in promoting the output growth.
Figure 4.23: Impulse responses to an inflation rate shock (Gabon)
The major limitation of the fixed exchange rate regime in Gabon is the inability of the Gabonese economy to cope with any external shock (IMF, 2010). Nevertheless the inflation rate is controlled through monetary policy instruments. In response to an inflation shock, Figure 4.23 shows that interest rates fall and money supply rises. To correct the inflation pressure, interest rates later pick up while money supply begins to
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fall. The corresponding effect on the manufacturing sector indicates that as soon as interest rates start rising and money supply falls, manufacturing output growth starts falling. Therefore, it follows the same trend explained in Figure 7.34 that as the monetary policy tries to control the economic instability it affects the manufacturing sector of Gabon negatively. Again, the shock causes the real exchange rate to fall steadily with the resultant appreciation in currency possibly being responsible for the steady fall in the manufacturing output until the seventh period before it starts picking up. This adjustment to the corresponding rise in the real exchange rate is in the seventh period.
Figure 4.24: Impulse responses to an exchange rate shock (Gabon)
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The impulse responses as shown in Figure 4.24 indicate that the variables in the system are hardly affected by any shock from the exchange rate. This is because the exchange rate in Gabon is fixed and hence may not constitute any significant influence on the monetary policy transmission mechanism since external reserves are always used as a buffer to sustain the fixed exchange rate.