CHAPTER FOUR
Monetary policy transmission mechanism and growth of the manufacturing sector in Africa’s oil exporting countries (AOECs).
and energy supplies and low human development index are testimony to the position of the World Bank and the IMF.
The dwindling nature of oil reserves in most AOECs and the myriad of problems facing them resulted in the stern warning by the IMF in 2010 that if by the end of the next two decades there is no positive effort towards diversification of these economies; most will run into deep economic recessions (IMF, 2010). This is where the manufacturing sector of these countries has a key role as many of the AOECs are heavily dependent on imported manufactured goods. The focus on the oil sector has led to the neglect of the manufacturing sector leading to a fall in domestic output and a rise in the prices of local manufactured consumer goods. For instance, the Algerian government has been subsidizing the price of manufactured consumer goods since year 2000. The manufactured goods subsidy bill rose from 185 million USD in 2011 to about 3 billion USD in 2012.This huge amount of money could have been invested in promoting the growth of the manufacturing sector.
Lack of growth in the manufacturing sector of the AOECs has aggravated the existence of structural imbalances in terms of high inflation rates and increased unemployment rates. In Nigeria in the past two decades more than 160 textile manufacturing firms have closed down leading to a loss of about 100,000 jobs (Adegbite, 2012).
Structural imbalances and economic instability in the AOECs have made inflation and exchange rate policies less effective in resuscitating ailing manufacturing sectors. In addition, building a virile non-oil sector that will be able to contribute about 50 percent to the GDP has been identified as a way of reducing dependence on the oil sector and promoting development of the AOECs (African Development Bank (ADB) report, 2010). This, according to the ADB (2010) requires a thorough assessment of the monetary policy administration in a way that will involve strategic synergy with both the exchange rate and inflation rate polices to create an enabling environment for the non-oil sector to thrive.
Consequently, manufacturing as a crucial part of the non-oil sector requires a favourable climate in terms of inflation and exchange rate polices and general administration of monetary policy to be able to remain domestically competitive in the AOECs.
For instance, there are two divergent views on the type of exchange rate system suitable for monetary policy instruments’ effectiveness in the monetary policy transmission mechanism (MTM). According to Aliyev (2012), policy makers are often faced with the challenges of choosing between a fixed exchange rate regime which is a good recipe for maintaining economic stability and a flexible exchange rate which gives independence to monetary policy. This challenge is even tougher in the oil rich countries that are faced with volatile foreign exchange windfalls. Some studies follow the Mundel- Flemming model that identified a flexible exchange rate system as the most suitable for monetary policy (see Blanchard, 2008; Degrauwe, 2000 and Gregory, 2007) while others have criticized some assumptions of the model and have posited that monetary policy can also be effective under a fixed exchange rate system. These researchers criticize the assumptions of exogenous money supply, perfect international capital markets and inelastic exchange rate expectations in the Mundell-Fleming model. They argued that in reality, the Central Bank has the power to operate within specific asymmetric bounds which enable it to control the domestic interest rate exogenously.
(see Serrano and Saumna, 2010; Habib and Sttrashy, 2008; Habib and Kalamova, 2007).
This study, therefore, is a country based analysis using five AOECs that have adopted different types of exchange rate systems. This will allow us to ascertain the exchange rate regime that is more suitable for monetary policy instruments to have a significant impact on manufacturing growth in the AOECs within the framework of the MTM.
Since Chapter Three has shown that monetary policy is more effective in the short run, a Structural Vector Auto-regression model is adopted since it is based on short run analysis. In addition, the idea of studying individual economies separately follows directly from the findings in Chapter Three where the panel result confirmed that
country specific factors might affect the results. That is, individual countries in the AOECs might likely possess some peculiar characteristics that distinguish them from each other.
Based on the foregoing, examining the linkages between the MTM and manufacturing output growth in the AOECs is imperative. This has the potential to expose the problems of the manufacturing sector and consequently tackle them through a robust monetary policy arrangement. To the best of our knowledge, there is no study that we are aware of that has investigated the monetary transmission process in AOECs, with particular attention to the manufacturing sector. In addition, this study, among others, contributes to the literature by attempting to understand the relationship between oil price shocks and manufacturing sector growth in AOECs within the context of the monetary transmission process.