Asymmetric exchange rate effects on trade balance in the common monetary area: Evidence from a nonlinear ARDL analysis

Abstract

Southern African Common Monetary Area (CMA) economies are exposed to fluctuations in the South African rand, with potential implications for external-sector performance. This study investigates the asymmetric effects of exchange-rate changes on the trade balance of CMA member countries. Annual time-series data for 1992–2023 cover the exchange rate, trade balance, gross domestic product, foreign direct investment, and inflation. The nonlinear autoregressive distributed lag (NARDL) approach captures possible differences between positive and negative exchange-rate movements. The findings indicate that both positive and negative exchange-rate changes have a positive effect on the trade balance in Lesotho and Namibia. In South Africa, positive exchange-rate changes have a positive and statistically significant effect on the trade balance, whereas in eSwatini, they have a negative effect. The results further establish long-run exchange-rate asymmetry in eSwatini and South Africa. In addition, FDI and GDP exert positive long-run effects on the trade balance across CMA countries, while inflation has a negative long-run effect. These findings suggest that a uniform exchange-rate policy response may be inappropriate across CMA economies because the trade-balance effects of exchange-rate movements differ across countries. Policymakers should therefore consider country-specific exchange-rate responses, supported by structural adjustments in trade policy. More broadly, maintaining a favourable trade balance requires an integrated approach that combines exchange-rate management with regional trade and macroeconomic policies aimed at strengthening external competitiveness and improving the resilience of CMA economies to persistent exchange-rate fluctuations.