MACROECONOMIC REFORMS & STRUCTURAL ADJUSTMENTS IN THE SUDAN: AN EMPIRICAL ANALYSIS (1960-1998)

Abstract

In the early 19905, Sudan has embarked on ., new ambitious macroeconomic reforms and structural adjustments aiming at stabilizing the macroeconomic enviromnent and realizing sustainable economic growth. Moreover, the country was committed to a vigorous economic and market liberalization which utilized devaluation and privatization as key tools. This thesis examines the likely effects of reforms and structural adjustments that have been implemented, particularly the effects of exchange rate devaluation and money supply being used as policy instruments on supply and demand sides as well as on wage structure and labor supply. In order to evaluate the effects of policy changes, a competent macroeconometrie model is constructed for the Sudan. A set of nineteen behavioral equations describes demand and supply in the model including the monetary sector and labor market. Three identities of real national income, trade balance and govemment revenues are introduced. The model is basically built around the Keynesian national income identity and is estimated by using both two stages least squares (2SLS) and three stages least squares (3SLS) techniques. Some key tests are conducted to ensure the plausibility of the behavioral equations. The results of these tests showed sound statistical modeling. The simulation exercises are mainly based on the exchange rate and money supply as policy instrument. Two scenarios are conducted; the first experiments with the fixed exchange rate calculated as the average of the exchange rate ruling during the period of simulations. The second scenario utilizes a normal growth of the exchange rate, as it would have grown without govemment intervention. The actual performance of the exchange rate is taken as the outcome of accelerating devaluation actually experienced by the economy. Money supply, as an instrument was used in two different experiments, the first experiment simulates the effect of reducing money supply by 10%, while the second experiment simulates the effect of increasing money supply by 10%. On the demand side, the results of simulating exchange rate as a policy instrument reveal that the first scenario has a negative effect of -9.30% on average on the overall GDP. In contrast, the second scenario produces a positive effect of 1 l.28%on GDP along the period of simulations. On the supply side the results reveal that a minor positive affect on the overall GDP when applying the first scenario. The newly simulated GDP due to this scenario is greater by 0.51% on average compared to the Actual; whereas the second scenario shows the most favorable effect on GDP, estimated on average at 1.84% along the simulation period. The other simulation exercise uses money supply as a policy instrument. The simulations produce the following results: The first experiment reduces the inflation rate by —53.77%, while second experiment increases inflation rate by an average of 29.70% along the tested period. The first experiment increases wages on average by 4.90%, while second experiment causes wages to decrease by an average of -7.84 %. The results also reveal that first experiment increases labor supply by an average of 11.57%. While the second experiment, reduces labor supply by an average of -2.90%. The results also show that under the first experiment nominal exchange rate is reduced by -30.42%. The second experiment, however, increases nominal exchange rate by 16.04 %.