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

Exchange rate depreciation and foreign currency debt sustainability under market uncertainty: Insights from Sub-Saharan Africa | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Exchange rate depreciation and foreign currency debt sustainability under market uncertainty: Insights from Sub-Saharan Africa Kwame Osei-Assibey This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-6400561/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract 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. Exchange rate depreciation market uncertainty external debt sustainability Sub-Saharan Africa Full Text Additional Declarations The authors declare no competing interests. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. Our growing team is made up of researchers and industry professionals working together to solve the most critical problems facing scientific publishing. Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-6400561","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":439947205,"identity":"8f7f4d4e-226e-4818-97ea-a150343cb9c1","order_by":0,"name":"Kwame Osei-Assibey","email":"data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAAZAAAAAyAQMAAABI0h/eAAAABlBMVEX///8AAABVwtN+AAAACXBIWXMAAA7EAAAOxAGVKw4bAAABLElEQVRIie2QMUuEYBjHH3nBFuVtfOSF+wyGIAcJfhVFsMW7JYimEA5quWj1IOgrCIFrHg4tF62KSxHddIMuYeDQG1ZE2uEY5A8e+D/w/w3PAzAw8AfBr0Sa3eIp5mEMIPVXRD4W9lA+4HVJ3aoogfMcFmCYdAeEsqrHU4pe+SRXOKJSLBSl11IYunoWgGsvZkCYfIqHSjC51iQLNeXcJ8oiaikjZum5BImlJrRggo92mE4ixhU7vAeRyF3KwUteQ2KaCZDXqkb7JvXWWxXGPD0HSISQgIiSyJvoiY1y53cqytXmKJurrh0kIO6/34KrtbZ36fJb5stZ1y24uo3S6ph/7CImWVWfTOmZ8/iwMQz+MWdZlG2lQf2+7FqfSfB/6f+Exj2LAwMDA/+FN7pDY3KLMhHcAAAAAElFTkSuQmCC","orcid":"","institution":"University of Johannesburg","correspondingAuthor":true,"prefix":"","firstName":"Kwame","middleName":"","lastName":"Osei-Assibey","suffix":""}],"badges":[],"createdAt":"2025-04-08 07:49:16","currentVersionCode":1,"declarations":{"humanSubjects":false,"vertebrateSubjects":false,"conflictsOfInterestStatement":false,"humanSubjectEthicalGuidelines":false,"humanSubjectConsent":false,"humanSubjectClinicalTrial":false,"humanSubjectCaseReport":false,"vertebrateSubjectEthicalGuidelines":false},"doi":"10.21203/rs.3.rs-6400561/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-6400561/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":80197438,"identity":"34d63444-d241-4c8e-bd69-cbcd32bc58bb","added_by":"auto","created_at":"2025-04-09 06:05:35","extension":"pdf","order_by":1,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":724918,"visible":true,"origin":"","legend":"","description":"","filename":"PaperforReviewAbl.pdf","url":"https://assets-eu.researchsquare.com/files/rs-6400561/v1_covered_717edff9-fc46-4321-b70b-67a1198382f3.pdf"}],"financialInterests":"The authors declare no competing interests.","formattedTitle":"\u003cp\u003eExchange rate depreciation and foreign currency debt sustainability under market uncertainty: Insights from Sub-Saharan Africa\u003c/p\u003e","fulltext":[],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":false,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":true,"hideJournal":true,"highlight":"","institution":"University of Johannesburg","isAcceptedByJournal":false,"isAuthorSuppliedPdf":true,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":true,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"Exchange rate depreciation, market uncertainty, external debt sustainability, Sub-Saharan Africa","lastPublishedDoi":"10.21203/rs.3.rs-6400561/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-6400561/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eHow would the exchange rate-external debt nexus behave when market uncertainty increases?\u0026nbsp;\u003c/p\u003e\n\u003cp\u003eBased 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. 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