Trade Realignments, Exchange Rate Volatility, and Financial Stability in Sub-Saharan Africa

Abstract

This study examines the impact of trade realignment, exchange rate volatility, and financial depth on financial stability in Sub-Saharan Africa. Recognizing the critical role of financial stability in promoting economic growth and resilience, the study aims to analyze both the long-run and short-run dynamics of macro-financial interactions and provide evidence-based policy insights. The scope of the study covers a panel of 40 Sub-Saharan African countries over the period 2000 to 2024. A Panel Vector Error Correction Model (VECM) is employed to capture the cointegration relationships and short-run adjustments among financial stability, trade realignment, exchange rate volatility, GDP growth, inflation, and financial depth. The findings reveal a significant long-term relationship between financial stability and the explanatory variables, with deviations from equilibrium gradually corrected over time. In the short run, financial stability responds to lagged effects of exchange rate volatility, trade realignment, financial depth, GDP growth, and inflation, highlighting the delayed transmission of shocks. The joint significance of these variables confirms that short-run fluctuations in financial stability are influenced by their combined effects rather than isolated changes. The study recommends enhancing financial sector depth, carefully managing trade realignments, mitigating exchange rate volatility, controlling inflation, and coordinating macroeconomic and financial policies to strengthen resilience. Policy implications include integrating trade and financial sector policies, implementing forward looking risk management frameworks, and promoting regional coordination to reduce cross-border vulnerabilities. Future research should explore the role of digital finance, country-specific heterogeneity, external shocks, and institutional quality in shaping financial stability in Sub-Saharan Africa.