Effect of real exchange rates on fruit exports in South Africa : a Vector Error Correction Model (VECM) approach

Abstract

A country’s exports occupy an important position in determining the state of national accounts. Thus, stable performance of the export sector is important for Gross Domestic Product (GDP) growth. In order to increase economic growth, export development is a critical avenue to pursue. The study examined the effect of real exchange rates (RER) on fruit exports in South Africa and determined the direction of causality between fruit exports and exchange rate changes. South African fruit producers competes fiercely in both the domestic and export markets.The study was correlational, intended to decipher the relationship between export performance and the various variables that influence it.The forty-eight (48) year period from 1971 to 2019 was chosen for econometric analysis because it contained the most complete data when all data sources were combined, and the 48 years period was appropriate for statistical/econometric analysis. The Granger Causality test was discussed and reviewed in light of the literature, as well as various factors affecting the study's level of validity and reliability. Long run OLS regression analysis revealed that a weakening exchange rate has a positive effect on both export values and quantities.The signs of inflation,TOT, and GFCF (as control variables) coefficients were also consistent with their a priori expectations. Numerous preliminary and descriptive tests were conducted to ascertain the data table's meaning and to determine the most appropriate statistical approach. The unit root and cointegration tests indicated that the data were integrated with order 1, in addition to the long OLS model, a Vector Error Correction Model (VECM) was implemented. The long run OLS regression revealed that a weakening exchange rate have positive effect on both export values and quantities. The study discovered that government spending in the form of Gross Fixed Capital Formation (GFCF) have a small but positive effect on fruit exports. thereby boosting exports by allowing the fruit to be sold at affordable prices in foreign markets. The study discovered that government spending in the form of Gross Fixed Capital Formation (GFCF) has a small but positive effect on fruit exports. As a result, the government and other stakeholders should work to enhance transportation and related infrastructure through increased public investment to streamline logistics and boost export performance.