Behavior of Sudan Balance Of Payments: An Application of a Monetary Approach (1970-2005

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Ibrahim Mohamed Ahmed Ali
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University of Khartoum
This study tests the monetary approach to balance of payments to explain the Sudan’s balance of payments deficit during the period 1970 - 2005. It examines whether money supply played a role in explaining the behaviour of balance of payments using cointegrating and error-correction modelling. To achieve this purpose a model developed by Mohsin Khan composed of a system of structural equations was used to show the channels through which monetary policy operates, to explain the Sudanese balance of payments deficit. The empirical results suggest that money did not play a significant role in explaining the behaviour of Sudan balance of payments. The long-run restriction and unrestricted test indicated that monetary variables (money supply and net foreign assets) could not explain the behavior of the balance of payments. The estimated short-run dynamics show that to some extent monetary variables play a role in explaining the behavior of balance of payments. But the main variables that play a significant role are real variables (GDP and aggregate expenditure). So that, a deficit on current account implies that the aggregate expenditure is greater than national income and that excess of expenditure over income will financed by borrowing abroad, selling existing assets to foreigners, or by running down the foreign reserves. So that, an implicit assumption is that the fiscal authorities are constrained in their deficit financing by the monetary authorities. Any policy that will successfully eliminate a balance of payments deficit on current account must either increase national income more than it increases aggregate expenditure, or else decrease aggregate expenditure more than it decreases national income. On the other hand, a surplus on current account requires aggregate expenditure to be smaller than domestic national income. This implies that domestic saving and taxes are larger than domestic investment and government expenditure and the difference is spent on net acquisition of foreign assets. The net acquisition of assets by private sector which is stable liner function of disposable income is not greatly changed by an increase in income, then; this implies that any change in government budget deficit or surplus will be mirrored in the balance of current account. Hence any increase in the government budget deficit or surplus will result in a deterioration in the balance on current account
University of Khartoum Sudan Balance Payments Application Monetary Approach
Ibrahim Mohamed Ahmed Ali, Behavior of Sudan Balance Of Payments: An Application of a Monetary Approach (1970-2005). – Khartoum : University of Khartoum, 2008. - 112 P. : illus., 28 cm., M.Sc.