Exchange Rate Pass-Through to Unemployment in Sub-Saharan Africa: Evidence from Nigeria and South Africa

SSRG International Journal of Economics and Management Studies ISSN: 2393 – 9125 /doi:10.14445/23939125/IJEMS-V7I3P116 Volume 7 Issue 3, 107-114, March, 2020 ©2020 Seventh Sense Research Group® Exchange Rate Pass-Through to Unemployment in Sub-Saharan Africa: Evidence from Nigeria and South Africa Sunday Edesiri Akiri1, Member Ahemen2, John Abu3 1,2,3 Department of Economics, Benue State University, Makurdi Received Date: 22 February 2020 Revised Date: 25 March 2020 Accepted Date: 28 March 2020 Abstract - This study evaluates the exchange rate passthrough to unemployment in Africa using evidence from Nigeria and South Africa. The pass-through was analyzed using two different transmission channels: first, through exports to unemployment, and second, through imports to unemployment. Panel Structural Vector Auto-Regressive (SVAR) was employed to analyze the impact of the transmission on the unemployment rate using quarterly data spanning the period of 2007-2018. The findings of the study revealed that the exchange rate does not exert the desired impact on unemployment in Sub-Saharan Africa through the export and import channels, implying that depreciation in the exchange rate exacerbates the problem of unemployment in SSA. The study concludes that the pass-through channels of export and import possess the potentials to lower unemployment in Nigeria and South Africa; however, the latent effect through other intermediate variables is contrary, thereby inhibiting the pass-through. The study recommends amongst others that, first, export revenues should be channeled into more remunerative alternatives (such as power and transport networks) to drive investment in Sub-Saharan Africa; second, imports expenditure should not be discouraged. However, consumer goods should be substituted for capital goods in order to provide key inputs for the growing industrial sector in Sub-Saharan Africa. Keywords – Exchange Rate, Unemployment, Pass-through, Sub-Saharan Africa, Panel SVAR. I. INTRODUCTION Since the seminal work of [1], definition and measures of economic development have shifted away from its traditional indices of sustained increase in Gross Domestic Product (GDP) per capita and desirable structural changes. Attention is now focused on improvement in the quality of life as complementing these indicators traditionally used as the measures of economic and social development (e.g. [2] and [3]).In the main, there is nine quality of life indicators, namely, material living conditions, productive or main activity, health, education, leisure and social interactions, economic and physical safety, governance and basic rights, natural and living environment, and overall experience of life. The second dimension, productive or main activity, which refers to gainful or recompensed work, has occupied a front burner in sub-Saharan Africa (SSA). With almost 200 million people between ages 15 and 24, Africa has the youngest population in the world, and is also growing rapidly [4]. Reference [4] projects that young people in Africa will double by 2045, resulting in what has recently been termed the “youth bulge” [5]. Hence, notwithstanding that 10 of the top 25 fastest growing economies in the world between 2004 and 2014 were in Africa, the unemployment surge, particularly among the youths, persists in SSA. Gallup surveys in 148 countries show that unemployment in SSA was 17 percent in 2011 while underemployment was highest in SSA by as much as 32 percent [6]. Other factors are that youths have little or no skills and are therefore largely excluded from a productive economic and social life. Those that have some education often exhibit skills irrelevant to the labor market, where education and skill requirements are increasing, resulting in millions of unemployed and underemployed youths [4]. That high economic growth is insufficient to guarantee productive employment for all shows the lack of capacities among these economies to rein in unemployment growth. Growth performance has thus declined from employment growth, presenting a major development challenge that requires strategic interventions that can lead to a rise in the rate at which jobs are being created to absorb the labor force’s growth. On the other hand, the real exchange rate has witnessed large fluctuations over the years. Since the global financial crisis of 2008 and its severe effects on the economies of the world, the real exchange rate has been declining while the unemployment rate has been increasing in Africa. And complete exchange rate pass-through (ERPT), which is a measure of how changes in the exchange rate are directly tied to the change in local prices, almost never happens; rather, incomplete ERPT is what actually occurs. Only part of the exchange rate is reflected in local prices, sometimes in a large proportion. Given that SSA is the largest open economy in the world, based on the size of its GDP [3] and the fact that the economy has been susceptible to the exchange rate shocks on its macroeconomic variables, it is important to understand the dynamics of the REPT on unemployment. This will help in designing a monetary policy framework This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/) Sunday Edesiri Akiri et al. / IJEMS, 7(3), 107-114, 2020 in response to the effects of the external shocks on the economy of SSA. In this context, the objectives of the paper are to: 1. Examine the response of unemployment in the face of monetary shocks on SSA. 2. Measures and evaluate the ERPT to unemployment in SSA, evidence from Nigeria and South Africa. Following this, introduction, the rest of the paper is structured as follows. Section 2 addresses the theoretical and empirical review. Section 3 gives attention to the methodology, while section 4 presents the empirical results and discussion. Section 5 proffers recommendations and concludes the paper. Majority of these studies that examined this relationship between exchange rate and unemployment are developed-countries based while a few are based on developing countries. The studies showed that the real exchange rate is a major determinant of unemployment, establishing that an appreciation of the real exchange rate increases unemployment rates are the result of losing trade competitiveness as exports become more expensive and vice versa.In contradistinction, [27] and [15]find that it is real exchange rate depreciation that increases the unemployment rate. Nonetheless, the study carried out by [18] and [22]found a negative relationship,while that of [16], [28], [21], and [23] found a positive relationship between exchange rate and unemployment.Besides, the various studies only focused on the linear relationship between the real exchange rate and unemployment, using Johansen cointegration and error correction models (VECM) as their estimating technique. Therefore, the findings from these studies could be misleading if there exists a non-linear relationship between the variables. To this end, this paper adopts the panel structural VAR to trace out the channels of exchange rate pass-through to unemployment in Africa, using Nigeria and South Africa as case studies. II. REVIEW OF RELATED LITERATURE Theoretically, export is a function of the level of domestic prices, exchange rate, and production. Hence, a depreciation of the real exchange rate causes export to be cheaper and imports to be more expensive, and consequently, the exporting country would gain trade competitiveness. It would increase the number of exports. The increase in exports results in an increase in production, and this increases the demand for the workforce and, as a consequence, it has positive effects on employment [7] &[8]. On the flip side, an appreciation of the real exchange rate causes exports to become expensive and imports to be relatively cheaper. Hence the exporting country will lose trade competitiveness if they do not change their prices in the domestic currency. If the effect of appreciation is significantly large, then reducing export prices may hamper the profit margins in this sense, [9] argue that the exporting country may prefer to absorb the effect of the appreciation so as to increase profit margins and pass a significant part of the effect of the appreciation to consumers, if only they have the markets powers to set prices. Generally, the effect of the real exchange rate on unemployment could be negative or positive depending on the specific characteristics of the market [10] & [11]. Empirically, copious studies suggest that a relationship exists between the real exchange rate and unemployment. These include [12], [13], [11], [14] – [26]. Exchange Rate Export Revenue III. METHODOLOGY A. Model Specification The study adopts the Panel Structural Vector Auto-Regressive (SVAR) method in estimating the exchange rate pass-through to Unemployment in Nigeria and South Africa. The paper evaluates two different channels through which the exchange rate can impact unemployment in Africa – the export channel and the import channel. The study, therefore, intends to trace the transmission through both channels hence providing two variants of the model to be estimated. The variants are presented in equations 1 and 2. First Variant The first variant traces the impact of the exchange rate on unemployment through export revenue, investment, money supply, and GDP. Money Supply Investment GDP Unemployment The model is specified as follows: ′ ′ ′ ′ ′ ′ 0 0 𝑈𝑁𝑀𝑡 = 𝛼11 𝑈𝑁𝑀𝑡−1 + 𝛼12 𝐺𝐷𝑃𝑡−1 + 𝛼13 𝑀𝑆𝑡−1 + 𝛼14 𝐼𝑁𝑉𝑡−1 + 𝛼15 𝑋𝑃𝑅𝑡−1 + 𝛼16 𝑅𝐸𝐸𝑅𝑡−1 + 𝛼12 𝐺𝐷𝑃𝑡 + 𝛼13 𝑀𝑆𝑡 0 0 0 + 𝛼14 𝐼𝑁𝑉𝑡 + 𝛼15 𝑋𝑃𝑅𝑡 + 𝛼16 𝑅𝐸𝐸𝑅𝑡 + 𝜀1𝑡 ′ ′ ′ ′ ′ ′ 0 0 𝐺𝐷𝑃𝑡 = 𝛼11 𝑈𝑁𝑀𝑡−1 + 𝛼12 𝐺𝐷𝑃𝑡−1 + 𝛼13 𝑀𝑆𝑡−1 + 𝛼14 𝐼𝑁𝑉𝑡−1 + 𝛼15 𝑋𝑃𝑅𝑡−1 + 𝛼16 𝑅𝐸𝐸𝑅𝑡−1 + 𝛼11 𝑈𝑁𝑀𝑡 + 𝛼13 𝑀𝑆𝑡 0 0 0 + 𝛼14 𝐼𝑁𝑉𝑡 + 𝛼15 𝑋𝑃𝑅𝑡 + 𝛼16 𝑅𝐸𝐸𝑅𝑡 + 𝜀2𝑡 ′ ′ ′ ′ ′ ′ 0 0 𝑀𝑆𝑡 = 𝛼11 𝑈𝑁𝑀𝑡−1 + 𝛼12 𝐺𝐷𝑃𝑡−1 + 𝛼13 𝑀𝑆𝑡−1 + 𝛼14 𝐼𝑁𝑉𝑡−1 + 𝛼15 𝑋𝑃𝑅𝑡−1 + 𝛼16 𝑅𝐸𝐸𝑅𝑡−1 + 𝛼11 𝑈𝑁𝑀𝑡 + 𝛼12 𝐺𝐷𝑃𝑡 0 0 0 + 𝛼14 𝐼𝑁𝑉𝑡 + 𝛼15 𝑋𝑃𝑅𝑡 + 𝛼16 𝑅𝐸𝐸𝑅𝑡 + 𝜀3𝑡 ′ 0 ′ ′ ′ ′ ′ 0 𝐼𝑁𝑉𝑡−1 + 𝛼15 𝑅𝐸𝐸𝑅𝑡−1 + 𝛼11 𝑈𝑁𝑀𝑡 + 𝛼12 𝐺𝐷𝑃𝑡 𝑈𝑁𝑀𝑡−1 + 𝛼12 𝐺𝐷𝑃𝑡−1 + 𝛼13 𝑀𝑆𝑡−1 + 𝛼14 𝑋𝑃𝑅𝑡−1 + 𝛼16 𝐼𝑁𝑉𝑡 = 𝛼11 0 0 0 + 𝛼13 𝑀𝑆𝑡 + 𝛼15 𝑋𝑃𝑅𝑡 + 𝛼16 𝑅𝐸𝐸𝑅𝑡 + 𝜀4𝑡 108 Sunday Edesiri Akiri et al. / IJEMS, 7(3), 107-114, 2020 ′ ′ ′ ′ ′ ′ 0 0 𝑋𝑃𝑅𝑡 = 𝛼11 𝑈𝑁𝑀𝑡−1 + 𝛼12 𝐺𝐷𝑃𝑡−1 + 𝛼13 𝑀𝑆𝑡−1 + 𝛼14 𝐼𝑁𝑉𝑡−1 + 𝛼15 𝑋𝑃𝑅𝑡−1 + 𝛼16 𝑅𝐸𝐸𝑅𝑡−1 + 𝛼11 𝑈𝑁𝑀𝑡 + 𝛼12 𝐺𝐷𝑃𝑡 0 0 0 + 𝛼13 𝑀𝑆𝑡 + 𝛼14 𝐼𝑁𝑉𝑡 + 𝛼16 𝑅𝐸𝐸𝑅𝑡 + 𝜀5𝑡 ′ ′ ′ ′ ′ ′ 0 0 𝑅𝐸𝐸𝑅𝑡 = 𝛼11 𝑈𝑁𝑀𝑡−1 + 𝛼12 𝐺𝐷𝑃𝑡−1 + 𝛼13 𝑀𝑆𝑡−1 + 𝛼14 𝐼𝑁𝑉𝑡−1 + 𝛼15 𝑋𝑃𝑅𝑡−1 + 𝛼16 𝑅𝐸𝐸𝑅𝑡−1 + 𝛼11 𝑈𝑁𝑀𝑡 + 𝛼12 𝐺𝐷𝑃𝑡 0 0 0 + 𝛼13 𝑀𝑆𝑡 + 𝛼14 𝐼𝑁𝑉𝑡 + 𝛼15 𝑋𝑃𝑅𝑡 + 𝜀6𝑡 The recursive SVAR model for the first variant is given as: 1 0 −𝛼21 0 −𝛼31 0 −𝛼41 0 −𝛼51 0 [−𝛼61 0 1 0 −𝛼32 0 −𝛼42 0 −𝛼52 0 −𝛼62 Where: UNM GDP MS INV XPR REER = = = = = = 0 0 1 0 −𝛼43 0 −𝛼53 0 −𝛼63 0 0 0 1 0 −𝛼54 0 −𝛼63 0 0 0 0 1 0 −𝛼64 0 𝑈𝑁𝑀𝑡 0 𝐺𝐷𝑃𝑡 0 𝑀𝑆𝑡 = 0 𝐼𝑁𝑉𝑡 0 𝑋𝑃𝑅𝑡 1] [𝑅𝐸𝐸𝑅𝑡 ] Unemployment, Gross Domestic Product, Money Supply, Investment, Export Revenue, Real Effective Exchange Rate. ′ 𝛼11 ′ 𝛼21 ′ 𝛼31 ′ 𝛼41 ′ 𝛼51 ′ [𝛼61 ′ 𝛼12 ′ 𝛼22 ′ 𝛼32 ′ 𝛼42 ′ 𝛼52 ′ 𝛼62 ′ 𝛼13 ′ 𝛼23 ′ 𝛼33 ′ 𝛼43 ′ 𝛼53 ′ 𝛼63 ′ 𝛼14 ′ 𝛼24 ′ 𝛼34 ′ 𝛼44 ′ 𝛼54 ′ 𝛼64 ′ 𝛼15 ′ 𝛼25 ′ 𝛼35 ′ 𝛼45 ′ 𝛼55 ′ 𝛼65 ′ 𝛼16 𝑈𝑁𝑀𝑡−1 𝜀1𝑡 ′ 𝛼26 𝐺𝐷𝑃𝑡−1 𝜀2𝑡 ′ 𝜀3𝑡 𝛼36 𝑀𝑆𝑡−1 + 𝜀 ′ 𝐼𝑁𝑉𝑡−1 4𝑡 𝛼46 𝜀5𝑡 ′ 𝑋𝑃𝑅 𝑡−1 𝛼56 [ 𝑅𝐸𝐸𝑅𝑡 ] [𝜀6𝑡 ] ′ 𝛼66 ] Second Variant The second variant traces the impact of the exchange rate on unemployment through import expenditure, private consumption expenditure, and GDP. Exchange Rate Import Expenditure Private Consumption Expenditure GDP Unemployment The model is specified as follows: ′ ′ ′ ′ ′ 0 0 0 𝑈𝑁𝑀𝑡 = 𝛽11 𝑈𝑁𝑀𝑡−1 + 𝛽12 𝐺𝐷𝑃𝑡−1 + 𝛽13 𝑃𝐶𝐸𝑡−1 + 𝛽14 𝐼𝑀𝑃𝑡−1 + 𝛽15 𝑅𝐸𝐸𝑅𝑡−1 + 𝛽12 𝐺𝐷𝑃𝑡 + 𝛽13 𝑃𝐶𝐸𝑡 + 𝛽14 𝐼𝑀𝑃𝑡 0 + 𝛽15 𝑅𝐸𝐸𝑅𝑡 + 𝜀1𝑡 ′ ′ ′ ′ ′ 0 0 0 𝐺𝐷𝑃𝑡 = 𝛽11 𝑈𝑁𝑀𝑡−1 + 𝛽12 𝐺𝐷𝑃𝑡−1 + 𝛽13 𝑃𝐶𝐸𝑡−1 + 𝛽14 𝐼𝑀𝑃𝑡−1 + 𝛽15 𝑅𝐸𝐸𝑅𝑡−1 + 𝛽11 𝑈𝑁𝑀𝑡 + 𝛽13 𝑃𝐶𝐸𝑡 + 𝛽14 𝐼𝑀𝑃𝑡 0 + 𝛽15 𝑅𝐸𝐸𝑅𝑡 + 𝜀2𝑡 ′ ′ ′ ′ ′ 0 0 0 𝑃𝐶𝐸𝑡 = 𝛽11 𝑈𝑁𝑀𝑡−1 + 𝛽12 𝐺𝐷𝑃𝑡−1 + 𝛽13 𝑃𝐶𝐸𝑡−1 + 𝛽14 𝐼𝑀𝑃𝑡−1 + 𝛽15 𝑅𝐸𝐸𝑅𝑡−1 + 𝛽11 𝑈𝑁𝑀𝑡 + 𝛽12 𝐺𝐷𝑃𝑡 + 𝛽14 𝐼𝑀𝑃𝑡 0 + 𝛽15 𝑅𝐸𝐸𝑅𝑡 + 𝜀3𝑡 ′ ′ ′ ′ ′ 0 0 0 𝐼𝑀𝑃𝑡 = 𝛽11 𝑈𝑁𝑀𝑡−1 + 𝛽12 𝐺𝐷𝑃𝑡−1 + 𝛽13 𝑃𝐶𝐸𝑡−1 + 𝛽14 𝐼𝑀𝑃𝑡−1 + 𝛽15 𝑅𝐸𝐸𝑅𝑡−1 + 𝛽11 𝑈𝑁𝑀𝑡 + 𝛽12 𝐺𝐷𝑃𝑡 + 𝛽13 𝑃𝐶𝐸𝑡 0 + 𝛽15 𝑅𝐸𝐸𝑅𝑡 + 𝜀4𝑡 ′ ′ ′ ′ ′ 0 0 0 𝑅𝐸𝐸𝑅𝑡 = 𝛽11 𝑈𝑁𝑀𝑡−1 + 𝛽12 𝐺𝐷𝑃𝑡−1 + 𝛽13 𝑃𝐶𝐸𝑡−1 + 𝛽14 𝐼𝑀𝑃𝑡−1 + 𝛽15 𝑅𝐸𝐸𝑅𝑡−1 + 𝛽11 𝑈𝑁𝑀𝑡 + 𝛽12 𝐺𝐷𝑃𝑡 + 𝛽13 𝑃𝐶𝐸𝑡 0 + 𝛽14 𝐼𝑀𝑃𝑡 + 𝜀5𝑡 The recursive model for the second variant is given as: 1 0 0 0 0 𝑈𝑁𝑀𝑡 0 −𝛽21 1 0 0 0 𝐺𝐷𝑃𝑡 0 0 −𝛽32 1 −𝛽31 0 0 𝑃𝐶𝐸𝑡 = 0 0 0 −𝛽43 1 −𝛽42 0 𝐼𝑀𝑃𝑡 −𝛽41 0 0 0 −𝛽54 0 −𝛽53 1] [𝑅𝐸𝐸𝑅𝑡 ] −𝛽52 [−𝛽51 Where: UNM GDP PCE IMP REER = = = = = ′ 𝛽11 ′ 𝛽21 ′ 𝛽31 ′ 𝛽41 ′ [𝛽51 Unemployment, Gross Domestic Product, Private Consumption Expenditure, Import Expenditure, Real Effective Exchange Rate. ′ 𝛽12 ′ 𝛽22 ′ 𝛽32 ′ 𝛽42 ′ 𝛽52 ′ 𝛽13 ′ 𝛽23 ′ 𝛽33 ′ 𝛽43 ′ 𝛽53 ′ 𝛽14 ′ 𝛽24 ′ 𝛽34 ′ 𝛽44 ′ 𝛽54 ′ 𝛽15 𝑈𝑁𝑀𝑡−1 𝜀1𝑡 ′ 𝛽25 𝐺𝐷𝑃𝑡−1 𝜀2𝑡 ′ 𝑃𝐶𝐸𝑡−1 + 𝜀3𝑡 𝛽35 𝜀4𝑡 ′ 𝐼𝑀𝑃𝑡−1 𝛽45 [ 𝜀5𝑡 ] [𝑅𝐸𝐸𝑅𝑡−1 ] ′ 𝛽55 ] were obtained from the Reserve Bank’s Bulletin of Economic Notes. The frequency of the data is quarterly and covers a 12 year period spanning 2007 to 2018. B. Data Sources The data for Nigeria were obtained from the Central Bank of Nigeria (Statistical Bulletin) and National Bureau of Statistics Annual Abstracts, while the data for South Africa 109 Sunday Edesiri Akiri et al. / IJEMS, 7(3), 107-114, 2020 IV. RESULTS AND DISCUSSION A. Preliminary Analysis The study used the panel SVAR to give empirical content to the stated objectives. Before estimation, the study conducted a preliminary analysis which provided direction with respect to the appropriate technique of analysis. The panel unit root test was employed to test for stationarity of the data series both at individual series and common series. The Levin, Lin, and Chu unit root tests were used for common series, while the Im, Pesaran, and Shin W-statistic were used for the individual series. The result is presented in Table 1. Variable UNM GDP M2 INV XPR IMP PCE REER Table 1: Stationarity Test Common Series Individual Series Value Prob. Value Prob. -8.57 0.0000 -10.58 0.0000 -6.17 0.0000 -7.13 0.0000 -10.44 0.0000 -2.96 0.0000 -5.42 0.0000 -4.61 0.0000 -8.97 0.0000 -7.61 0.0000 -11.96 0.0000 -11.86 0.0000 -7.62 0.0000 -9.52 0.0000 -7.09 0.0000 -5.75 0.0000 Source: Eviews10 Output, 2019. Table 1 shows that the test statistics for the common series and individual series and their associated one-sided p values. It further shows that the variables achieved stationarity at first difference. This prompted the test for cointegration to Order of Integration I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1) ascertain the existence of a linear combination and a longrun relationship between the variables. The information is contained in Table 2. Table 2: Cointegration Test Trace Statistic Prob.** Max-Eigen Statistic First Variant 140.7442 0.0000 48.53332 r = 0* 92.21090 0.0003 35.10977 r ≤ 1* 57.10113 0.0053 31.68305 r ≤ 2* 25.41808 0.1470 16.63138 r≤3 8.786704 0.3855 8.774635 r≤4 0.012070 0.9123 0.012070 r≤5 Both Trace test and Max-Eigen test indicates 3 cointegrating eqn(s) each at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level Second Variant 110.3211 0.0000 48.64340 r = 0* 61.67768 0.0015 42.68473 r ≤ 1* 18.99295 0.4934 13.58569 r≤2 5.407261 0.7641 5.372410 r≤3 0.034851 0.8519 0.034851 r≤4 Both Trace test and Max-Eigen test indicates 2 cointegrating eqn(s) each at the 0.05 level Source: Eviews10 Output, 2019. Null Hypothesis The Trace test and Max-Eigen value test shows a long-run equilibrium relationship between the variables. This implies a stationary linear combination. As such, the non-stationary time series are co-integrated. Having established the relationship, the Panel SVAR model is employed on the data to examine the details in the relationships. Prob.** 0.0045 0.0355 0.0140 0.1901 0.3054 0.9123 0.0005 0.0003 0.3999 0.6943 0.8519 B. Exchange Rate Pass-through to Unemployment in Nigeria and South Africa The exchange pass-through to unemployment in Sub-Saharan Africa was examined using two channels – the export channel and the import channel to examine the response of unemployment to shocks in the exchange rate. The contemporaneous effect of the shocks from exchange rate to unemployment is given in Table 3: 110 Sunday Edesiri Akiri et al. / IJEMS, 7(3), 107-114, 2020 Variables REFER REER XPR INV M2 GDP UNM 1.00 0.01 -0.003 0.02 -0.001 -0.0008 REFER REER IMP PCE GDP UNM 1.00 0.00 0.02 0.007 -0.003 Table 3: Structural VAR Estimates XP INV M2 First Variant (Export Channel) 0.00 0.00 0.00 1.00 0.00 0.00 0.005 1.00 0.00 0.009 -0.26 1.00 0.07 -0.64 -0.02 0.005 -0.06 -0.00 IMP PCE GDP Second Variant (Import Channel) 0.00 0.00 0.00 1.00 0.00 0.00 -0.06 1.00 0.00 -0.005 -0.17 1.00 0.013 -0.06 -0.12 Source: Eviews10 Output, 2019. Table 3 reveals the transmission through the various channels. From the export channel, the transmission reveals that the exchange rate affects export revenue positively. In turn, exports affect investment positively. Investment affects money supply negatively, money supply affects GDP negatively, and GDP affects unemployment positively. Furthermore, table 3 shows that unemployment responds negatively to contemporaneous changes in the exchange rate, investment, and money supply through the export channel. Conversely, it further shows that unemployment responds positively to contemporaneous changes in export revenue and GDP. Table 3 also shows the transmission through the import channel. The transmission channel shows that unemployment responds negatively to contemporaneous changes from GDP; GDP responds negatively to contemporaneous changes from private consumption; private consumption is affected positively by contemporaneous changes in imports; while imports respond positively to depreciation in the exchange rate. Furthermore, it shows that shocks to exchange rate, private consumption, and GDP exert a negative effect on unemployment, while shocks to import exert a positive effect on unemployment. GDP UNM 0.00 0.00 0.00 0.00 1.00 0.06 UNM 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 1.00 - C. Impact of exchange Rate Pass-through to Unemployment in Nigeria and South Africa The impulse response function shows the long-run response of shocks from the exchange rate and the associated variables to unemployment. The impact of the shocks from exchange rate to unemployment in Nigeria and South Africa is shown in Figures 1 and 2. Figure 1 shows that the shocks from the exchange rate have a positive impact on unemployment in all 10 quarters in the long run. The impact of the shock appears to be temporary as it shows convergence towards equilibrium. It further shows that a 1% shock to the exchange rate would lead to a 0.37% increase in unemployment. Similarly, shocks to investment and GDP have a positive impact on unemployment. Their parameters reveal that their innovations will cause unemployment to increase by 0.19% and 0.44%, respectively. The impact of investment appears to be temporary and short-lived, while that of GDP seems to be long-lasting. Conversely, impulses from export revenue and money supply lead to a reduction in unemployment. A shock to export revenue will negatively affect unemployment by 0.70%, while the impulses from the money supply will affect unemployment by 0.19%. The effect of export revenue is permanent due to its divergence from equilibrium which is good news, while that of the money supply is temporary and shows a possibility for a reversal in the nearest future. 111 Sunday Edesiri Akiri et al. / IJEMS, 7(3), 107-114, 2020 Response to C holesky One S.D . (d.f. adjusted) Innovations ± 2 S.E. Res pons e of UNM to U NM R es pons e of UNM to LOG(GD P) 1 R es pons e of U N M to LOG(M2) 1 Res pons e of UN M to LOG(INV) 1 R es pons e of UNM to LOG(XPR ) 1 Res pons e of UN M to LOG(REER ) 1 1 0 0 0 0 0 0 -1 -1 -1 -1 -1 -1 1 2 3 4 5 6 7 8 9 10 1 R es pons e of LOG(GD P) to U N M 2 3 4 5 6 7 8 9 10 1 R es pons e of LOG( GDP) to LOG( GDP) 2 3 4 5 6 7 8 9 10 1 R es pons e of LOG(GDP) to LOG(M2) 2 3 4 5 6 7 8 9 10 1 R es pons e of LOG( GD P) to LOG( IN V) 2 3 4 5 6 7 8 9 10 1 Res pons e of LOG(GD P) to LOG(XPR ) .4 .4 .4 .4 .4 .4 .2 .2 .2 .2 .2 .2 .0 .0 .0 .0 .0 1 2 3 4 5 6 7 8 9 10 1 Res pons e of LOG(M2) to U N M 2 3 4 5 6 7 8 9 10 1 R es pons e of LOG(M2) to LOG( GD P) 2 3 4 5 6 7 8 9 10 1 Res pons e of LOG(M2) to LOG(M2) 2 3 4 5 6 7 8 9 10 2 3 4 5 6 7 8 9 10 1 Res pons e of LOG(M2) to LOG( XPR ) .04 .04 .04 .04 .04 .02 .02 .02 .02 .02 .02 .00 .00 .00 .00 .00 .00 -.02 -.02 -.02 -.02 -.02 -.02 2 3 4 5 6 7 8 9 10 1 Res pons e of LOG(INV) to UN M 2 3 4 5 6 7 8 9 10 1 Res pons e of LOG( IN V) to LOG( GD P) 2 3 4 5 6 7 8 9 10 1 R es pons e of LOG(INV) to LOG(M2) 2 3 4 5 6 7 8 9 10 1 Res pons e of LOG( INV) to LOG( INV) 2 3 4 5 6 7 8 9 10 1 R es pons e of LOG( INV) to LOG( XPR ) .10 .10 .10 .10 .10 .05 .05 .05 .05 .05 .00 .00 .00 .00 -.05 -.05 -.05 -.05 4 5 6 7 8 9 10 1 R es pons e of LOG(XPR) to UN M 2 3 4 5 6 7 8 9 10 1 R es pons e of LOG(XPR) to LOG(GDP) 2 3 4 5 6 7 8 9 10 1 R es pons e of LOG(XPR) to LOG(M2) 2 3 4 5 6 7 8 9 10 1 R es pons e of LOG( XPR ) to LOG( IN V) 2 3 4 5 6 7 8 9 10 1 Res pons e of LOG(XPR ) to LOG( XPR ) .10 .10 .10 .10 .05 .05 .05 .05 .05 .00 .00 .00 .00 .00 .00 -.05 -.05 -.05 -.05 -.05 -.05 -.10 -.10 -.10 -.10 -.10 -.10 2 3 4 5 6 7 8 9 10 1 Res pons e of LOG(REER) to UN M 2 3 4 5 6 7 8 9 10 1 Res pons e of LOG(REER) to LOG( GDP) 2 3 4 5 6 7 8 9 10 1 Res pons e of LOG(REER ) to LOG(M2) 2 3 4 5 6 7 8 9 10 2 3 4 5 6 7 8 9 10 1 Res pons e of LOG(REER ) to LOG( XPR ) .04 .04 .04 .04 .00 .00 .00 .00 .00 -.04 -.04 -.04 -.04 -.04 -.04 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 2 3 4 5 6 7 8 9 10 2 3 4 5 6 7 8 9 10 2 3 4 5 6 7 8 9 10 2 3 4 5 6 7 8 9 10 R es pons e of LOG(R EER) to LOG(R EER ) .00 2 10 .05 .04 1 9 .10 1 Res pons e of LOG(R EER) to LOG( IN V) 8 Res pons e of LOG(XPR) to LOG(R EER ) .10 1 7 .05 .00 -.05 3 6 .10 .00 2 5 R es pons e of LOG(IN V) to LOG(R EER ) -.05 1 4 Res pons e of LOG(M2) to LOG( REER ) .04 1 3 .0 1 Res pons e of LOG(M2) to LOG(INV) 2 Res pons e of LOG(GD P) to LOG(R EER ) .04 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Figure 1: Export Channel of Exchange Rate Pass-through to Unemployment rate and private consumption appear to be permanent while that of GDP is temporary. Contrarily, a shock to imports will affect unemployment positively, and the impact is permanent and long-lasting. Figure 2 shows that a 1% shock to imports will cause unemployment to reduce by 0.48%. Figure 2 shows the impulse response from the import channel.It shows that unemployment responds positively to impulses from the exchange rate, private consumption, and GDP. Specifically, it shows that as the shocks affect the exchange rate, private consumption, and GDP by 1%, unemployment will increase by 0.65%, 0.43%, and 0.22%, respectively. The shocks to exchange Response to Cholesky One S.D. (d.f. adjusted) Innovations ± 2 S.E. Response of UNM t o UNM Response of UNM t o LO G (G DP) Response of UNM t o LO G (PCE) Response of UNM t o LO G (I MP) Response of UNM t o LO G (REER) 2 2 2 2 2 1 1 1 1 1 0 0 0 0 0 -1 -1 -1 -1 -1 2 4 6 8 10 2 Response of LO G (G DP) t o UNM 4 6 8 10 2 Response of LO G (G DP) t o LO G (G DP) 4 6 8 10 2 Response of LO G (G DP) t o LO G (PCE) 4 6 8 10 2 Response of LO G (G DP) t o LO G (I MP) .4 .4 .4 .4 .4 .2 .2 .2 .2 .2 .0 .0 .0 .0 2 4 6 8 10 2 Response of LO G (PCE) t o UNM 4 6 8 10 2 Response of LO G (PCE) t o LO G (G DP) 4 6 8 10 4 6 8 10 2 Response of LO G (PCE) t o LO G (I MP) .0 8 .0 8 .0 8 .0 8 .0 4 .0 4 .0 4 .0 4 .0 4 .0 0 .0 0 .0 0 .0 0 .0 0 - .0 4 - .0 4 - .0 4 - .0 4 - .0 4 2 4 6 8 10 2 4 6 8 10 2 Response of LO G (I MP) t o LO G (G DP) 4 6 8 10 2 Response of LO G (I MP) t o LO G (PCE) 4 6 8 10 2 Response of LO G (I MP) t o LO G (I MP) .1 5 .1 5 .1 5 .1 5 .1 0 .1 0 .1 0 .1 0 .1 0 .0 5 .0 5 .0 5 .0 5 .0 5 .0 0 .0 0 .0 0 .0 0 .0 0 - .0 5 - .0 5 - .0 5 - .0 5 - .0 5 2 4 6 8 10 2 4 6 8 10 2 Response of LO G (REER) t o LO G (G DP) 4 6 8 10 2 Response of LO G (REER) t o LO G (PCE) 4 6 8 10 2 Response of LO G (REER) t o LO G (I MP) .0 8 .0 8 .0 8 .0 8 .0 4 .0 4 .0 4 .0 4 .0 4 .0 0 .0 0 .0 0 .0 0 .0 0 - .0 4 - .0 4 - .0 4 - .0 4 - .0 4 4 6 8 10 2 4 6 8 10 2 4 6 8 10 2 4 6 8 10 Figure 2: Import Channel of Exchange Rate Pass-through to Unemployment 112 4 6 8 10 4 6 8 10 4 6 8 10 Response of LO G (REER) t o LO G (REER) .0 8 2 10 Response of LO G (I MP) t o LO G (REER) .1 5 Response of LO G (REER) t o UNM 8 Response of LO G (PCE) t o LO G (REER) .0 8 Response of LO G (I MP) t o UNM 6 .0 2 Response of LO G (PCE) t o LO G (PCE) 4 Response of LO G (G DP) t o LO G (REER) 2 4 6 8 10 Sunday Edesiri Akiri et al. / IJEMS, 7(3), 107-114, 2020 The variance decomposition, which shows the proportion of shocks accounted for by the explanatory variables, is presented in Table 4: Period 1 4 7 10 Period 1 4 7 10 S.E. UNM 1.70 2.74 3.35 3.79 100.00 83.32 63.07 50.17 S.E. UNM 1.76 2.87 3.50 3.92 100.00 89.95 71.84 58.61 Table 4: Variance Decomposition GDP M2 Export Channel 0.00 0.00 0.89 5.83 3.73 6.59 6.94 6.28 INV XP REFER 0.00 2.25 2.55 2.75 0.00 5.24 16.35 24.07 0.00 2.47 7.76 9.79 GDP PCE IMP Import Channel 0.00 0.00 0.00 0.31 2.34 4.65 1.18 4.97 10.76 1.92 7.57 13.95 Source: Eviews10 Output, 2019. REAR Table 4 indicates that the highest proportion of shocks affecting unemployment emanates from itself in both variants of the model – 50.17% and 58.61% in the export and import channels, respectively. Amongst the explanatory variables in the export channel, export revenue accounts for 24.07% of the shocks affecting unemployment, while exchange rate, investment, GDP, and money supply account for 25.76% of the innovations affecting unemployment. Domestic investment accounts for the least of the impulses affecting unemployment at 2.75%. Through the import channel, exchange rate and imports account for 17.95% and 13.95%, respectively, while private consumption and GDP account for 7.57% and 1.92%, respectively. GDP accounts for the least of the innovations affecting unemployment from the model. 0.00 2.76 11.25 17.95 - which competes locally with industries that produce similar commodities. Hence, this affects economic output, which distorts the growth process and also spurs unemployment. The study concludes that the exchange rate passthrough to unemployment in Nigeria and South Africa is not complete. The depreciation in the exchange rate leads exacerbates the problem of unemployment in Sub-Saharan Africa. The pass-through channels of export and import possess the potentials of lowering unemployment in Nigeria and South Africa; however, the latent effect through other intermediate variables is contrary. On the basis of the findings, the study recommends that: i. Export revenues should be channeled into more remunerative alternatives to driving investment in Sub-Saharan Africa. Investments in key infrastructure such as power, transport networks, and basic infrastructure should be prioritized so as to create an enabling environment for private investment to thrive. ii. Imports expenditure should not be discouraged. However, consumer goods should be substituted for capital goods in order to provide key inputs for the growing industrial sector in Sub-Saharan Africa. This would promote faster output and create employment opportunities in the longrun. iii. If these measures are not taken, the exchange rate pass-through to unemployment in Sub-Saharan Africa will continue to be impaired by the overlaps. REFERENCES V. CONCLUSION AND RECOMMENDATIONS The study finds that the exchange rate does not exert the expected impact on unemployment in SubSaharan Africa through the export and import channels. The results reveal that depreciation in the exchange rate is likely to lead to an increase in unemployment in SSA. The pass-through effect also confirms this result as the channels of transmission does not exert the desired impact. From the export channel, for instance, export revenue postulates a tendency of lowering unemployment; however, the intermediate variables, investment, and GDP responds in the opposite direction. A possible explanation is that the bulk of domestic investment is not drawn from domestic investment, rather is mobilized from household savings. Its deficiency hampers the growth of the economy with resulting consequences on the rate of unemployment. This is further accentuated by the weak contributions of GDP and investment in the model. Similarly, the import channel also shows that import expenditure has the potential of reducing unemployment; however, its latent effect on unemployment through private consumption and GDP negates such attributes. 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