Exchange rates, balance of
payments, economic growth
and supply-side policies
Examination style paper 2 question
This case study focuses on exchange rates, balance of payments, economic growth, and supply-side
policies. This paper can be completed as a homework or classwork exercise and should take around
105 minutes. It is based on a paper two examination question using the new syllabus. The
maximum mark for this paper is 40.
Exchange rates and trade in Sub-Saharan African countries
2023 has been a challenging year for many Sub-Saharan African countries because of the
depreciation in their exchange rates. Nigeria and Angola are the two biggest losers with the Nigerian
naira and the Angolan kwanza losing nearly 40% of their value against the US dollar. But other
countries have also seen significant depreciations in their currencies: South Sudan (33%), Burundi
(27%), Democratic Republic of Congo (18%), Kenya (16%), Zambia (12%), Ghana (12%) and Rwanda
(11%). [Paragraph 1]
An important reason for the depreciating values of Sub-Saharan nations' exchange rates is the weak
trading position many of the countries are in. A country like Angola, for example, has oil to export
but imports a high proportion of manufactured goods like machinery, computers, mobile phones
and cars. To buy imported manufactured goods a country such as Angola needs foreign currency like
the US dollar and this structural weakness puts downward pressure on its exchange rate. Sub-
Saharan countries also have significant amounts of external debt owed to more developed countries
and the debt servicing costs put further downward pressure on their currencies. The cost of servicing
external debt has increased over the last 12 months because of rising global interest
rates. [Paragraph 2]
A depreciating currency has a significant impact on the populations of sub-Saharan countries that
face rising prices for imported goods. This is made worse by the shortages of foreign currency that
force many people to buy foreign currency in parallel markets where the exchange rate is
significantly lower than the official rate. Businesses in these countries have seen their costs increase
because a depreciating exchange rate increases the costs of imported raw materials and
components. [Paragraph 3]
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InThinking www.thinkib.net/Economics 1
Governments in Sub-Saharan countries are in a challenging policy situation because of
their depreciating currencies. They are forced to keep domestic interest rates relatively high to
prevent further currency depreciation and this removes monetary policy as a policy option for
domestic policy objectives. In addition, rising debt servicing payments restrict the use of fiscal
policy. [Paragraph 4]
The solution to the currency difficulties of Sub-Saharan African countries may well be supply-side
policies that reduce Sub-Saharan countries' dependency on imported manufactured goods. This
supply-side policy approach may well increase their economic growth rates. Kenya and Zambia are,
for example embarking on significant road building projects. Several Sub-Saharan Countries have
also embarked on education and training programmes. A problem many Sub-Saharan African
countries have encountered is the cost of financing infrastructure projects and education and
training programmes. [Paragraph 5]
Some Sub-Saharan African countries have embarked on a market-based strategy to develop their
manufacturing bases. This involves giving tax advantages to businesses and privatising key industries
to encourage the development of infrastructure. Deregulation of markets which makes it easier for
businesses to operate would also help this. There are, however, concerns about growing inequality
and falling industry standards that could result from this approach. [Paragraph 6]
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InThinking www.thinkib.net/Economics 2
Table 1 shows Ghana's balance of payments data for 2022. All values are in millions of US dollars.
Item $m
Exports of goods 479
Imports of goods 560
Exports of services 123
Imports of services 207
Net property income -34
Net current transfers +60
Current account balance A
Capital account +12
Net direct investment +150
Net portfolio investment -25
Reserve assets B
Questions
a. Define the term currency depreciation. [2]
b. Using an exchange rate diagram, explain how a rise in demand for imported manufactured goods
by Angolan businesses and individuals would affect the value of the Angolan kwanza. [4]
c. Using an AD/AS diagram, explain how a depreciation in the Nigerian naira might affect the
country's rate of inflation. [4]
d. Using a PPC diagram, explain the opportunity cost to South Sudan of a reallocation of resources
from primary production to manufacturing. [4]
e. Using the data in table 1:
(I) Calculate the value of Ghana’s current account balance of payments. [2]
(ii) Calculate the change in Ghana’s reserve assets. [2]
(iii) State one item that might be included in Ghana’s portfolio investment. [1]
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f. (i) Define the term commodity. [2]
(ii) Using a demand and supply diagram, explain how an increase in the supply of oil leads to a fall in
Angola's export revenue. [4]
g. Using information from the text and your knowledge of Economics, evaluate the view that
interventionist supply-side policies are the best way for Sub-Saharan African countries to achieve
economic growth. [15]
Total [40]
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InThinking www.thinkib.net/Economics 4
