Economic Restrictions and Currency Performance: Evidence of African Countries

This study explores the impact of diverse economic restrictions on currency performance. We assess a panel dataset of 30 African countries for the period 1990–2010. Our empirical evidence is based on the xed effect regression and the Quantile regression approach. We nd that the United States, European Union, economic and intensity sanctions weaken the real exchange rates. However, we establish that the U.N. sanctions are insignicant. As for the policy implication, sanctioned countries should implement a policy that could mitigate the adverse consequences of economic restrictions on currency performance. This study explores the impact of diverse economic restrictions on currency performance. This study assesses a panel dataset of 30 African countries extracted from the World Development Indicators of World Bank database and the German Institute of Global and Area Studies' Sanction Database (GIGA) for 1990-2010. To capture the currency performance, we adopt the real effective exchange rate index computed by the World Bank, which an increase represents an appreciation of the local currency and vice-versa. We employ ve specic sanctions, which include sanctions imposed by the United States, European Union, United Nations, Economic sanctions and Intensity sanctions. The empirical evidence is based on the xed-effect controls for the observed heterogeneity via xed effects regression, while the Quantile regression approach is employed to consider the initial levels of exchange rate movement subsequently. With Quantile regression, exchange rates are distinguished in terms of weak, static, and strong rates. The


Introduction
Currency performance is mostly used interchangeably with the real effective exchange rate. Generally, the exchange rate system could either be xed or oating. Under the xed policy, the exchange rate movement is usually covered by the government, while the forces of demand and supply determine the equilibrium exchange rate under the oating system. The oating system implies that the higher demand currency appreciates while the high supply currency depreciates. Aside from the consumer price index that is the in ation rate, the exchange rate is mostly used to determine a country's economy's soundness.
The exchange rate is considered a critical investment factor whose uctuations could affect the economy's competitiveness in the global market, the economic stability, and even the prices of nished products (Antonakakis & Kizys, 2015). Similarly, regular currency swaps are dispersing in the cross-border investment and international trade, which underlines the importance of exchange rate stability.
Existing literature has identi ed diverse exchange rate movement determinants. It is argued that remittance affects the exchange rate, which results in currency uctuations. The massive remittance in ows are never problematic to the broad economy since such in ows could be easily absorbed.
However, the situation differs for the small economy, especially the developing countries whose massive remittance absorption is not compatible (Rana, Anik, & Biplob, 2019). Intuitively, the negative effect of the remittance on the exchange rate is evident when the foreign currency received in the home country excesses the domestic currency, and the foreign currency is used for purchases of products and assets instead. The gross domestic product has been identi ed as one of the determinants of exchange rate movement. This implies that GDP stability strengthens the value of a currency (Ramasamy & Abar, 2015).
Alternatively, high exchange rate volatility could disrupt investment decisions, which surge uncertainty in the economy. Oaikhen & Aigheyisi (2015) emphasize that such risk instigated by the volatility could negatively in uence economic growth through dampening the international trade and capital in ows, investor assurance, productivity, and consumption. Notably, oil is measured as a leading determinant of exchange rate uctuations (Turhan, Sensoy & Hacihasanoglu, 2014). It is then evident that oil-producing country tends to experience domestic currency appreciation alongside increasing oil prices and vice-versa (Singhal, Choudhary & Biswal, 2019). Similarly, economic sanctions contribute to international oil shocks and foreign direct investment, in uencing political policies (Dizaji, 2014;Wang, Wang, & Chang, 2019).
There remains limited literature exploring the outcomes of sanctions, especially in Africa. Africa has experienced more sanctions from the United Nations, the European Union, and the United States than other continents (United States Institute of Peace, 2016). Most restrictions are targeted towards resolving con icts, disrupting democracy, or penalty for gross violations of human rights. Recently, the U.S. Department of State announced its imposition of travel restrictions on Nigerians that destabilize democracy in the February and March 2019 general elections. Again, following the 2015 outbreak of the violent crisis in Burundi, the European Union and the United States placed sanctions on the country. The outbreak was caused by the announcement of President Pierre Nkurunziza seeking the third term in o ce. Travelling bans and asset freezes were imposed by the E.U. and the U.S., respectively, on people obstructing the stability and peace of Burundi.
Similarly, the United Nations has imposed an arms embargo and freezing of assets on Somalians that deemed to have disrupted the stability of Somalia since 1992. In addition, the U.S. also imposed various sanctions to tackle the security deterioration in Somalia and asset freezes on Somalians associated with AI-Shabaab, the terrorist organization. Although Somalia held a general election in January 2013 in which the U.S. o cially recognized the new government. However, the U.S. prolonged its measures on Somalia for a further year in April 2018.
In addition, these restrictions have been recently substituted with economic sanctions, which tend to harm the targeted countries. Economic sanctions are coercive procedures between political pressure or extreme military interference (Wang et al., 2019). The economic restrictions often entail the extraction of typical trade and nancial dealings for security and nancial policy purposes. The recent sanctions imposed on Venezuela and its economic reaction to such sanctions have surged the academic and policymakers' interest in how economic sanctions seemingly distress the target, sender, and the surrounding economies. However, little is known on how exchange rates react to economic restrictions in Sub-Saharan Africa, and this study leans towards lling the knowledge gap in the literature. Since the stable exchange rate in uences the balance of payments and the macro-economy performance, accurately identifying the impact of economic sanctions on currency performance, especially in Sub-Saharan Africa, has essential policy implications.
The research closest to our study is Wang et al. (2019) that concludes that plurilateral sanctions, sanctions intensity, and the E.U. sanctions positively in uence the exchange rate volatility for 23 target countries, while unilateral and the U.S. sanctions have no signi cant effect on the exchange rate volatility.
We depart from Wang et al. (2019) in three ways. First, contrary to the use of exchange rate volatility and arguments surrounding the estimation of exchange rate volatility (Kilicarslan, 2018;Ofori, Obeng, & Armah, 2018), we use the real effective exchange rate index computed by the World Bank in which an increase represents an appreciation of the local currency and vice-versa. Second, instead of considering a country-speci c or cross-regional study, we restrict the scope of this study to Africa that is faced with multifaceted challenges (Ojeka et al., 2019). Lastly, this study employs diverse estimation strategies, which include Fixed Effect Regression and Quantile Regression. The xed effect controls the observed heterogeneity via xed effects regression, while the Quantile regression approach is employed to consider the initial levels of exchange rate movement. With Quantile regression, exchange rates are distinguished in terms of weak, static, and strong rates.
This study assesses the impact of diverse economic restrictions on currency performance. This study employs a panel dataset of 30 African countries for the period 1990-2010. The following ndings are established. We nd that the United States and European Union sanctions, respectively, weaken the real exchange rates, and the results disclose that the coe cients of the United States and European Union sanctions are signi cantly negative. This infers that with the increase of U.S. and E.U. sanctions on African countries, the target region's exchange rates weaken. In addition, we establish that the U.N. sanctions are insigni cant. This infers that irrespective of the number of sanctions by the U.N., there remains frail effects on the exchange rate in the region. It is deduced that the estimate of economic sanction is negatively signi cant, which shows that economic sanction negatively impacts the real exchange rate of the target region. Sanction intensity is negatively signi cant, which infers that such intensity negatively impacts the real exchange rate of the target region.
The subsequent sections follow the identi ed pattern. Section 2 highlights the theoretical underpinning and review of empirical evidence. Section 3 undertakes data, while Section 4 deals with the methodology and empirical strategy. Section 5 presents empirical results and further analysis. Section 6 gives conclusions.

Theoretical Highlights And Empirical Evidence
There remain diverse reasons underpinning the imposition of sanctions. The reasons for the sanctions could be instigated for expressive or instrumental purposes, among others (Doxey, 1983). The expressionist theory avers sanctions represent channels used by the country that impose sanctions called the "sender" for communicating her displeasures on the activities of the target country (Kaempfer & Lowenberg, 1988;Lektzian & Souva, 2007). On the other hand, the theory of instrumentality suggests that restrictions are scal incentives intended to in uence countries' decisions with an interesting aspect of deterrence and the ideology of "carrot-and-stick" (Kaempfer & Lowenberg, 1988;Drezner, 1999). In the word of Hufbauer (2007), the author asserts that "the imposition of sanctions conveys a triple signal: To the target country, it says the sender does not condone the target's actions; to allies, it says that words will be supported with deeds; and to domestic audiences, it says the sender government will act to safeguard the nation's vital interests." In this light, a strand of literature has explored the e cacy of sanctions in achieving economic and possibly political policies on the target country. These sanctions are often channelled towards in uencing the target country's actions, which frequently result in a change in regimes for promoting democracy and human rights, alteration of strategic decision, counterterrorism, nonproliferation, con ict resolution, and many more (Smith, 2013). However, the direct and indirect consequences on the target country (i.e., adverse on foreign investment, economic pressure, in ation, and restrictions on trade dealings) are inherent in the sanction's imposition.
Nevertheless, the sanctions, especially economic sanctions imposed on target countries and their consequences on their currency performance, have considerably been established in the literature on nance and economics (Wang et al., 2019). There exists a bi-directional ow between sanctions and foreign exchange rate volatility. Theoretically, the model developed for the collective sanctions imposed on target countries proves that economic sanctions in uence behavioural changes through economic pressure imposition (Pape, 1997). In accordance with Galtung (1967), economic sanctions could cause huge economic harm resulting in "political disintegration" of the target states, thereby forcing them to conform with the sender's requests. Intuitively, the "political disintegration" usually involves the disagreement within the country's leadership or between the leadership and the citizens as regards, which could cause economic instability. In the case of nationalism, the sanction could integrate the leadership and its citizens harmoniously to war against consequential adversity emanating from the sanctions (Galtung, 1967). Following Galtung's revised theory (i.e., "rally-round-the ag" effects), restrictions could initially encourage political integration and eventually result in political disintegration as economic restrictions surge.
From the empirical perspective, recent literature remains on the determinants of exchange rates alongside the consequential effect of sanctions (Hayakawa, Kim, & Yoshimi, 2017;Kilicarslan, 2018;Ofori et al., 2018;Rana et al., 2019;Wang et al., 2019). Interestingly, Hufbauer (2007) establishes the negative consequences of U.S. sanctions on target country foreign trade dealings. This result identi es that the decline in trade dealings is with the United States and the allies. Recent studies explore the behaviour of macroeconomic variables that are linked directly or indirectly to the target foreign direct investment (Lektzian & Biglaiser, 2013;Dizaji & van Bergeijk, 2013). It is traceable that sanctions could in uence foreign direct investment or divestment. For instance, sanctions imposed on South Africa during the apartheid resulted in global divesture in the region that contributed to the apartheid extinction (Eyler, 2015).
However, little is known on how exchange rates react to economic restrictions in Africa, and this study leans towards bridging such a knowledge gap in the literature. This study broadens the literature on economic sanctions by exploring the consequential effect of diverse economic restrictions on the African experience's currency performance. Foreign exchange rate uctuation as a macroeconomics measure speci cally tends to in uence the country's economic conditions rather than trade dealings or foreign direct investment (Dizaji & van Bergeijk, 2013. Based on Hufbauer (2007) study, it avers more comprehensive sanctions tend to in uence international trade rather than nancial or trade restrictions, we intuitively presume that if diverse comprehensive restrictions result in altering output, then a corresponding foreign exchange rate movement is expected.

Data
The empirical estimation effectiveness is increased using panel data compared to time series or crosssectional data because panel data tends to minimize the level of collinearity between independent variables and increase the degree of freedom (Imai, 2011). This study explores a panel dataset of 30 African countries extracted from the World Development Indicators of World Bank database and the German Institute of Global and Area Studies' Sanction Database (GIGA) for 1990-2010. The panel dataset of selected 30 Sub-Saharan Africa is based on the United States, the United Nations, and European Union sanctions. The adopted periodicity is based on the data relevance and constraint on the availability of data. Details on the variable de nitions and the summary of descriptive statistics are presented in Table  1. Appendix 1 reveals the list of countries used.

Currency Performance
We adopt the real effective exchange rate index computed by the World Bank to capture the currency performance. The real effective exchange rate is the currency value against the weighted average of different foreign currencies. This is measured by the nominal effective exchange rate divided by a price de ator or index of cost. For Sub-Saharan Africa, the real effective exchange rate index is the nominal index adjusted for relative changes in consumer prices, while an increase represents an appreciation of the local currency and vice-versa.

Sanctions
There remain various forms of sanctions imposed, especially by developed economies on low-income and middle-income economies. We employ ve speci c sanctions, including sanctions imposed by the United States, European Union, United Nations, Economic sanctions and Intensity sanctions. The developed economies could employ measures (such as aid sanctions, nancial sanctions; arms embargo; visa ban; military interruption; comprehensive trade embargo, diplomatic sanctions, commodity embargo, ght ban and freezing of nancial assets) to initiate sanctions. In addition, we measure various sanctions imposed by the United States, European Union, and United Nations via dummy various or categorical variable (i.e., 0,1). First, we use 1 if the United States and 0 impose the sanction otherwise to capture U.S. sanctions. Second, we adopt 1 if European Union and 0 impose the sanction otherwise to capture E.U. sanction. Third, we input 1 if the United Nations and 0 impose the sanction otherwise to capture U.N. sanctions. Four, 1 is used to capture economic sanction if the sanctions imposed are designed to in uence the target state's economy and 0 other. Lastly, sanction intensity measure ranges between 0 and 5, where 5 represents comprehensive trade embargo, 4 identi es commodity embargo and ight bans, 3 captures aid sanctions, 2 represents sanctions target towards the military, and 1 identi es sanctions target towards designated individuals and entities.[1]

Control Variables
We include a battery of control variables in order to account for omitted variables, namely, current account balance, lending rate, in ation and gross domestic savings. We expect that these variables tend to in uence the level of the real effective exchange rate. Muller-Plantenberg (2010) asserts that the balance of payment discrepancies affects the claim for diverse currencies in the foreign exchange market, which in uences the exchange rate. We anticipate that the current account balance, which is re ected by the balance of payment, will affect changes in the exchange rate. In ation represents the average rate of price changes in the goods and services index. In accordance with the study of Ito & Sato (2008) in Indonesia avers when in ation increases, the domestic currency decline, which tend to change the trade structure while the exchange rate depreciates alongside. Existing literature has concluded that domestic saving is negatively associated with the exchange rate, signifying that domestic saving depreciates the exchange rate (Ito & Krugger, 2009). Thus, we employ domestic saving to evaluate the gross domestic saving effect on the real effective exchange rate.
[1] For more information on sanction measures, check this link https://data.gesis.org/sharing/#!Detail/10.7802/1346 Model This study employs the Fixed Effect Regression and Quantile Regression to explore economic sanctions on the real exchange rates in Africa. The fixed effect controls for the observed heterogeneity via fixed effects regression. This accounts for the possibility of cross-serial dependence together with the heteroscedasticity and serial correlation in the residuals, which is corrected by the standard errors (see Driscoll & Kraay 1998).
Accordingly, we obtain our results by utilizing the fixed effects estimation strategy in the following model.
Where Y it denotes the dependent variable of interest, that is, the real exchange rates. The variable X it depicts the vector of explanatory variables, that is, the various sanctions imposed on the selected countries, whereas yZ i denotes the country-level control variables and Eit is the error team.
Subsequently, the Quantile regression approach is employed to consider the initial levels of exchange rate movement (i.e., the approach is used to describe the dependent variable distribution). Whereas the standard Ordinary Least Square shows the impact of the one or more independent variable on the conditional mean of a dependent variable, the quantile model unveils the relationship between the independent variables and the condition quantiles of the dependent variable rather than the condition means of the dependent variable in the case of ordinary least square (OLS). In essence, this approach allows flexibility for data with heterogenous conditional distribution, and the regression is more robust than OLS for outliners. With Quantile regression via 0.25, 0.50, 0.75 & 0.90 quantile, our dependent variables (i.e., exchange rates) is distinguished in weak, static, and strong rates. Thus, in the Quantile regression, the initial level of real exchange rates is considered in the relationship between the various sanctions imposed on the selected countries.

4.1
Summary Statistics Table 1 indicates the descriptive statistics of variables used in the estimate analyses. Firstly, the real exchange rate movement (logRate) has a mean of 1.746 over the sampled period, which reveals the level of volatility with a minimum value of -2.61 and 9.828. Similarly, Table 1 reports the summary statistics of the underlying variables adopted for sanctions imposed by the United States, European Union, United Nations with economic sanctions, and the level of intensity with maximum and minimum values of 0 and 1 (refer to section 2.2.2). The mean and standard deviation of the sanctions imposed by the United States, European Union, United Nations with economic sanctions and intensity remain low, representing similar characteristics among the Sub-Saharan African countries. In addition, Table 2 presents the correlation coefficients between variables. The table presents a low correlation between the variables. Thus, there exists no multicollinearity statistical problem in the models.  Table 3 discloses the main findings of this study using the fixed effect regression. The information criteria used for the validity of the step-wise fixed effect regression are the Ftest and the coefficient of determination. The F-test reflects the combined significance of the models' coefficients, which is significant with a p-value of 0.0000. The R 2 shows the models' explanatory power with a minimum of 0.167. Based on the information criteria, the fixed effect regressions are devastatingly valid and reliable for empirical interference.  (2019), which asserts that the sanctions are more strenuous and short-term. In the short term, the target countries might not seek countermeasure to reduce the negative influence of the sanctions. Table 3 shows the estimate of U.N. sanctions. The result reports show that the coefficient of U.N. sanctions is insignificant. This infers that irrespective of the number of sanctions by the U.N., there remains frail effects on the exchange rate in the region. The insignificant impact of the U.N. sanctions could be traced to the fact that U.N.

Moreover, Model 3 in
rarely imposes sanctions on the target region. The insignificance could be traced to the assertive sanctions imposed by the United Nations in the short-term period.
Under Table 3, Model 4 estimates the economic sanction. It is deduced that the estimate of economic sanction is negatively significant at a 5% level of significant, which shows that economic sanction negatively impacts the real exchange rate of the target region. This result conforms with the economic sanction definition, which implies that any method of sanctions that relate to the region's economy will influence the region's real exchange rate. This conforms with the perception that economic sanctions influence such a country's economy (Dylan, 2017). In addition, Model 5 shows the Sanction Intensity estimate. The coefficient of sanction intensity is negatively significant at a 1% level of significance. It infers that such intensity has a negative impact on the real exchange rate of the target region. This suggests that the real exchange rate is weakened with sanction intensity, which identifies a lesser relationship between two economies in finance, trade, and personal exchange.
In addition, a significant control variable (i.e., inflation) has the expected outcomes. From Table 3, we establish a significantly negative effect of the average rate of price changes in the goods and services index (i.e., inflation rate) on currency performance, which in agreement with the study of Ito & Sato (2008). This result implies that inflation increases the domestic currency decline, which tends to change the trade structure while the exchange rate depreciates alongside. However, the result for lending supports that there is a significantly positive effect on currency performance. Against the conventional agreement that asserts the effect of lending rate on currency depreciation, our result shows otherwise.
As identified in the earlier section, the Quantile regression approach is employed to consider the initial levels of the exchange rate movement. Quantile regression is useful to identify the conditional determinants of estimates. Hence, to investigate how the initial level of the real exchange rate plays out when developed economies impose various sanctions, we adopt Quantile Regression. With Quantile regression, exchange rates are distinguished in terms of weak, static, and strong rates.  Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 While Table 4 (i.e., the sample that falls within the 25 th percentile) reiterates the results of the baseline finding, the results in Table 5 show that U.S., E.U., U.N., Economic and Intensity sanctions are negative and significant at 1% level, which implies the effects of such sanctions contribute significantly on weakening real exchange rate for economies in the 50 th percentile of the sample. This suggests that such economies lack the strategies to countermeasure the negative effect of the imposed sanctions. Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 In addition, results in Table 6 reveal that U.S. and E.U. sanctions are negative and significant at a 1% level, which indicates that such sanctions result in the weakened real exchange rate for countries in the 75 th percentile of the sample. Finally, for countries in the 90 th percentile of the sample, results in Table 7 show that only significant with the negative contribution to the weakened real exchange rate of the target region. The discrepancies in results could be traceable to the strategies implemented by the target country to counterfeit the impact of such sanctions on its economy. The reasons behind such significant influence of E.U. sanctions over other sanctions could be explained by the speculations highlighted by Wang, Wang, & Chang (2019) that compare U.S. and E.U. sanctions' relevance on exchange rate volatility. The authors emphasize that (1) the E.U. sanction tends to be more concentrated as it focuses on five specific instruments of sanction; (2) the approach of E.U. sanction is mostly short term and (3) the proximity of E.U. to the target countries tends to have the stronger influence of the target economy. Standard errors in parentheses*** p<0.01, ** p<0.05, * p<0.1   Table 2. The result shows that U.S., E.U., and Intensity sanctions significantly contribute to the weakened real exchange rate in the target region during the sample period without a financial crisis. It can be inferred that the insignificance effect of the economic sanctions measure remains ineffective as the target countries could navigate through the strategy implemented to counter the impact of economic sanctions on their economy before the 2008 financial crisis.

Conclusion
This study explores the impact of diverse economic restrictions on currency performance. This study assesses a panel dataset of 30 African countries extracted from the World Development Indicators of World Bank database and the German Institute of Global and Area Studies' Sanction Database (GIGA) for 1990-2010. To capture the currency performance, we adopt the real effective exchange rate index computed by the World Bank, which an increase represents an appreciation of the local currency and viceversa. We employ ve speci c sanctions, which include sanctions imposed by the United States, European Union, United Nations, Economic sanctions and Intensity sanctions. The empirical evidence is based on the xed-effect controls for the observed heterogeneity via xed effects regression, while the Quantile regression approach is employed to consider the initial levels of exchange rate movement subsequently. With Quantile regression, exchange rates are distinguished in terms of weak, static, and strong rates.
The following ndings are established. We nd that the United States and European Union sanctions, respectively, weaken the real exchange rates, and the results disclose that the coe cients of the United States and European Union sanctions are signi cantly negative. This infers that with the increase of U.S. and E.U. sanctions on African countries, the target region's exchange rates weaken. In addition, we establish that the U.N. sanctions are insigni cant. This infers that irrespective of the number of sanctions by the U.N., there remains frail effects on the exchange rate in the region. It is deduced that the estimate of economic sanction is negatively signi cant, which shows that economic sanction negatively impacts the real exchange rate of the target region. Sanction intensity is negatively signi cant, which infers that such intensity negatively impacts the real exchange rate of the target region.
As for the policy implication, sanctioned countries should implement a policy that could mitigate the adverse consequences of economic restrictions on currency performance. We suggest that sanctioned countries could establish unaffected economic treaties with neighboring countries through various channels and ensure policy that promotes domestic demand for goods or services rather than foreign trade dependency.