Exchange rate depreciation and foreign currency debt sustainability under market uncertainty: Insights from Sub-Saharan Africa

How would the exchange rate-external debt nexus behave when market uncertainty increases? Based on what extant literature suggests, a bidirectional causal relationship on the exchange rate-external debt nexus can be justified on both theoretical and empirical grounds. The paper theorizes that a positive feedback mechanism may exist between exchange rate depreciation and exchange rate market uncertainty: When such feedback relationship persists and causality on exchange rate – external debt nexus runs both ways, then a vicious cycle could ensue and the endogenous consequence of the link between persistent exchange rate depreciation, heightened market uncertainty and external debts sustainability can produce a destabilizing outcome. The paper adopted the PVAR framework to examine these propositions using data on a panel of Sub-Sharan African countries: Not only are this group debts significantly denominated in foreign currency due to the persistence of the problem of ‘original sin’ , but they also continue to face challenges with periods of sustained heightened market uncertainty, episodes of persistent currency depreciations, debt management problems and, are also comparably more vulnerable to adverse exogenous shocks to exchange rate uncertainty and capital flow volatility. The empirical evidence, policies and strategies discussed should be useful to guide governments, policymakers, and international development partners in designing and implementation of robust systems, strategies and credible policies that help prevent the possibility of a destabilizing vicious cycle of currency depreciation, market uncertainty, and debt management problems.