The Impact of Foreign Exchange rate Fluctuations in Inflation using the ARDL model Applied study- Sudan during the period (1979 – 2017)

Prepared by the researcher   : Dr. Salah Mohamed Ibrahim Ahmed – Associate Professor of Economics, Sudan

Democratic Arab Center

Journal of Afro-Asian Studies : Thirteenth Issue – May 2022

A Periodical International Journal published by the “Democratic Arab Center” Germany – Berlin.

Abstract

The study aims to know the impact of the foreign exchange rate in inflation, which is reflected in the economic conditions, the high general level of prices, economic instability, high inflation rates, and price instability. The study adopted the econometrics historical statistical descriptive approach E- views 10, the method of least squares (O.L.S), co- integration, Granger’s causal relationship and the use of ARDL. The study also found out the most important results: There is a direct relationship between the foreign exchange rate and inflation, so that the higher the foreign exchange rate, the higher the rates of inflation automatically and directly. The study proved that there is an impact of exchange rate fluctuations on the gross domestic product (GDP). The study also recommended the following: Continuing to adopted the policy of the managed flexible exchange rate to eliminate the parallel market, and to strengthen and support the official market. Attracting the savings of workers abroad, encouraging them and tempting them with remunerative prices. Attracting capital abroad and encouraging foreign direct and indirect investment by simplifying procedures, unifying the investment window, and facilitating transfer procedures. The authorities should find a mechanism to reduce inflation rates and adopt a flexible and balanced monetary policy. Maintain reserves of foreign exchange.

Introduction

Since the end of the seventies, the foreign exchange rate in Sudan has witnessed instability that has a direct impact on inflation and the continuous rise in the general level of prices. The rise in prices of consumer goods, and consequently the hyperinflation occurred, where inflation has exploded in an unprecedented manner. The inflation rate has reached three correct figures. the economic situation has deteriorated. Also, there were fluctuations in foreign exchange rates, and this was reflected in consumer prices.  Then the economic crisis, the horrifying rise in the prices of necessary consumer goods, and the worsening economic situation, have a clear impact on the standard of living and significant increase in the poverty rate in society, and threatened it. This is the life of the citizens which warns them of the early danger of hunger, extreme poverty, unemployment and destitution, which leads to bad morals, decadence and deterioration of society. This leads emergence of strange habits such as encroachment, looting and theft, insecurity, loss of security, deprivation, hunger and homelessness, an increase in emigration abroad in search of a situation better economics, and a decent and secure life.

First: Scientific and Practical Importance:

The scientific importance of this study stands out in adding information on the exchange rate from fluctuations and changes that had a clear impact on the overall economy in Sudan. Also the repercussions of the continuous rise in the prices of imported and local essential commodities. The practical importance lies in providing results and recommendations that help specialists and monetary policy makers.

 The first axis: The methodological framework of the study

The problem of the study: The problem of this study is embodied in the impact of the changes and fluctuations of the foreign exchange rate on inflation and its repercussions on economic life. It is also aims to know the general level of prices in an unusual way that the Sudanese economy has not witnessed over time due to economic distress and deterioration in living conditions.

Study questions: What is the impact of foreign exchange rate fluctuations in inflation? What is the impact of foreign exchange in economic life and the general level of prices? What happens to inflation in GDP?

The importance of the study: The importance of the study highlights the fluctuations changes in exchange rate that had a clear impact on overall economy in Sudan. It also highlights the repercussions of the continuous rise in the prices of imported and local essential goods.

Objectives of the study: Knowing the causes of exchange rate fluctuations and their repercussions on the continuous rise in the general level of prices. And how to find a tool to address the factors that lead to high rates of inflation.  Also it aims at seeking to follow an effective monetary policy that helps in stabilizing the economy with regard to the exchange rate and inflation.

Study Hypothesis: There is a direct, statistically significant relationship between the foreign exchange rate and inflation.

Study Methodology: The study adopts the descriptive historical-statistical approach using E- views 10, co-integration, Granger’s causal relationship, least-quartiles method (O.L.S) and simple linear regression (ARDL).

Study boundaries: the spatial boundaries of Sudan, the continent of Africa. Time limits: the period (1979 – 2017).

Sources for collecting data: secondary sources, which are books, references, reports and periodicals

Second: Previous studies:

1 / Study (Abdul Baqi2021) ⁽¹³⁾ and others: Entitled ‘Analysis of the causal relationship between the exchange rate and the general level of prices using the ARDL model’ – a case study of Sudan during the period 1989-2018. The study aimed to analyze the causal relationship between the general level of prices and the actual real exchange rate in Sudan, using the Auto Regressive Distributed Lag Model (ARDL) to test the causal relationship long and short term. Through the results, the Long Run Form and Bounds test proved that there is a long-term equilibrium relationship between the study variables and the general level of prices (the exchange rate and the consumer price index) during the period. The study also found the existence of a three-stage Least Squares reciprocal relationship between the variables of the study. There is a causal relationship Granger Causality Tests, a trend in one direction from the general level of prices towards the consumer price index and vice versa, and the results also showed that there is a causal relationship in one direction of the exchange rate and the actual real to the general level. For prices, the ARDL model proved that the general level of prices depended on a previous value and the previous values ​​of the actual real exchange rate of the Sudanese pound against the US dollar. (Increasing production of cotton, groundnuts, sesame and Gum Arabic) and substituting imports to curb domestic demand in order to contain the growth of imports and alleviate inflationary pressures. And works to create an environment conducive to increasing flows of remittances from Sudanese working abroad and their suitability to the current economic situation.

2 / Study (Ibrahim 2021) ⁽¹⁴⁾ and others: Entitled ‘The Impact of the Sudanese Pound Exchange Rate Policies on Consumer Prices and Inflation Rates’ – An applied study of Sudan during the period (1980 – 2014). The study aimed to analyze the static and the direction of the short and long-term relationship between the actual real exchange rate, Consumer prices and inflation rates. The problem of the study was the continuous fluctuations of exchange rates affecting consumer prices and inflation rates. The study adopted the descriptive approach in view of the nature of the problem and the available information about it and discussed it within the framework of the study. For the purpose of analyzing time series, this requires unit roots test and co- integration test. The most important results are the existence of an integrative relationship between the study variables.

 Also, there is an effect of exchange rate fluctuations on changes in consumer prices and inflation rates, as well as the continuous decline in the Sudanese pound exchange rate by the International Monetary Fund, which led to the weakness of the Sudanese pound against foreign currencies, and the weakening of purchasing power. The study recommended that the central bank should not interfere in the exchange rate to balance supply and demand for foreign currencies. Working to raise the value of the Sudanese pound against foreign currencies in the official market and to eliminate the parallel market, which greatly harmed the national economy. This can only be achieved by increasing production, creating a climate for foreign investments in the country, and attracting foreign currency remittances from residents abroad.

The second axis: The theoretical framework

The concept of the exchange rate, which is the fixed exchange rate that is determined based on the gold rule that allows the exchange of currency for gold, or according to the rules of the International Monetary Fund, or through financial  and monetary policies. As for the changing exchange rate, it means leaving the currency to the forces of supply and demand and it is called floating the currency or the intervention of the executive and monetary authorities according to the economic, political and social conditions) ⁽¹⁾.

Types of transactions in the exchange rate ⁽²⁾:

1. 1. Cash exchange rate: It is the process of exchanging one currency for another at the current rate, within 48 hours from the moment of concluding the contract.

There are two types of monetary exchange rate: the purchase rate is the number of units of the national currency that the bank pays to buy one unit of the foreign currency. The selling price is the number of units of the national currency that the bank requires to sell one unit of the foreign currency. The selling price is always greater than the purchase price. The difference between them represents the bank’s margin, which is the selling price minus the purchase price ⁽³⁾.

2. 2. Derivative exchange rate (reciprocal cross): When exchanging currencies in a particular financial center, the price of two transactions against the exchange may be unavailable, and for the importance of the exchange, their price must be determined and this is done based on the relationship of the two currencies to a third currency, and the prices calculated in this way are called cross prices. The price of any currency can be calculated in terms of another currency.
3. 3. The rise and fall of the value of a currency: The rate of increase or decrease in the value of a currency can be determined by calculating the percentage change in the exchange rate. By taking the difference between the new exchange rate and the old exchange rate and the ratio of this difference to the old rate, multiplying by 100 to get the percentage change. Usually, currency rates change with improvement or deterioration, and there is an improvement in the price of one currency against another if the price of this currency at the end of the period is greater than its price at the beginning of the period. And there is a deterioration in the price of the currency against the other currency if its price at the end of the period is lower than its price at the beginning of the period ⁽⁴⁾.
4. 4. Currency rates in financial centers: the price of one currency compared to another changes continuously on a daily basis at the level of financial centers. This change leads to the emergence of different prices for the currency, and this difference prompts exchange agents to carry out arbitration operations between prices in various financial and exchange centers, buying in a low currency price, and reselling in a financial position for an increase in the currency price. If there is no change in prices, there is no sense in the arbitration process, and there is no need to sell or buy to benefit from the price difference ⁽⁴⁾.

5 . Forward exchange rate: The term exchange rate is defined as the exchange of one currency for another during a specific time in the future to be agreed upon in advance at a specific price between the seller and the buyer, based on the exchange rate prevailing at the moment of concluding the contract. The exchange process is called term if the operation is carried out after 48 hours from the date of concluding the contract. The term exchange process is used by companies operating in foreign trade to avoid risks arising from possible fluctuations in currency exchange rates.

It is also used by speculators when they expect the price of the currency they are buying to rise ⁽⁵⁾.

6. Arbitration when exchanging currencies: There are three types of arbitration when exchanging currencies. They are direct arbitration, which is the operations that result from comparing the price of a particular currency in terms of another currency in two different financial centers. Indirect arbitrage, this type appears when there are three currencies and one of these currencies is not directly priced in terms of one of the last two currencies, but is priced in terms of the third currency. Arbitration on interest rates, this type of arbitration arises when there is a difference in interest rates on a particular currency in two different financial centers ⁽⁶⁾.
7. Exchange Rate Options: The exchange rate has two options: the purchase option: which gives its owner the right to buy a specific amount of foreign currency against the national currency at a specific price and for a pre-determined maturity. On this basis, the purchase option is not considered binding on the buyer, but rather enables him to implement the purchase decision or to waive it. And the put option: It is the one that gives the right to its owner the right to sell a certain amount of foreign currency against the national currency at a certain price and on a specific, predetermined maturity date. And the option to sell is not considered binding on its owner, but the seller can implement this option or waive it according to the developments of the exchange market ⁽⁶⁾.
8. The concept of the exchange market: The foreign exchange market is all transactions that require exchange other than some financial markets such as the stock exchange, the foreign exchange market is not located in a specific place, but the market spreads through financial centers all over the world subject to trade restrictions or government control ⁽⁷⁾.

The main components of the foreign exchange market:

1. Central banks intervene in the market for the purpose of buying and selling currencies to influence the exchange rate. On the other hand, the implementation of the orders of governments as state banks. As for currency transactions, this intervention is by the central bank in order to protect the position of the local currency or some other currencies because it is considered responsible for the exchange rate of the currency.

2.Commercial banks carry out transactions for companies and clients, and in some cases use foreign exchange brokers to match sellers and buyers of foreign currencies together. Most of the activities in the foreign exchange market ⁽⁸⁾.

3. Corporations from time to time need to convert receipts and payments from one currency to another.
4. Non-bank financial institutions, such as insurance companies ^(12).

The third axis: The literature of the Study

Inflation in Sudan ,  the period from 1979-2017:

   Inflation is one of the main factors that lead to imbalance in the overall economy, and thus to economic instability, as inflation rates impact macroeconomic indicators. The rise in inflation rates is due to the increase in money supply at a rate that exceeds the increase in the supply of goods and services. Since the escalation of inflation rates means an increase in the prices of domestic goods and services, it negatively affects the competitiveness of exports and, consequently, the external account ⁽¹²⁾.

   Over the past eras, the Sudanese economy witnessed continuous economic deterioration and low growth. In some cases, the Sudanese economy recorded negative growth rates, offset by higher growth rates in the population, which led to a continuous deterioration in the real incomes of individuals. It coincided with the low performance in economic growth and an acceleration in the rise in inflation rates. This resulted in a continuous deterioration in local and national savings, and that period witnessed a shortage of food and the spread of famine, and this deterioration led to negative effects on the social fabric represented in displacement.

It is noted that inflation rates have been on the rise since 1970, and this period is considered the beginning of the imbalance in the structure of the Sudanese economy as a result of confiscations and nationalization of commercial, industrial and agricultural enterprises and the banking sector, which led to an imbalance in economic activity in both the public and private sectors, as well as regulatory policies in managing the economy , especially setting prices in the stages of production, import, export and distribution. Also, the outbreak of civil war in the south after it stopped for a decade. This period also witnessed many disasters such as desertification and drought, floods and torrential rains, in addition to political instability, as the country was exposed to the worst periods of drought during the years 83/84-84/85, which led to A decline in agricultural production, a decline in farmers’ incomes, and a massive shortage in agricultural crops stocks. Famine spread on a large scale in the country, which led to an increase in the deterioration of the economic situation, which had already taken a deterioration as a result of the internal and external imbalance and the inflationary pressures that the national economy was exposed to. The size of the debt in the year 1988-1989 was double the size of the debt in the past years. The average budget deficit during the years 76-1989 reached 10% of the GDP, which confirms the imbalance in the financial policies. The financial performance deteriorated a lot after 1984 as a result of the sharp deterioration in public revenues, while public expenditures maintained their growth level of 22% of the output. Thus, the ratio of the deficit to (GDP) increased from an average of 10% in the period 76/84 to 13% in the period 85/89. Also, entering into short and medium-term external commitments to finance projects that are not economically feasible, in addition to the cash and commodity loans that were employed in the areas of consumption and current spending, these obligations were beyond the country’s capacity, which the state was unable to pay, and debts accumulated until they reached more than 23 billion dollars in the year 2000 ⁽¹²⁾.

In 1991, the inflation rate reached 121%, which indicates the accelerated and continuous deterioration in the national economy. This escalation in inflation rates necessitated the continuous expansion of the public budget deficit and its financing from the banking system. In the first half of 1996, the Sudanese economy began trotting at a rapid pace towards collapse, if the inflation rate developed in the period from January to June and reached 162%, and this is considered the fastest in the history of the Sudanese economy, and its details were as follows:

Table No. (3/2) the evolution of the inflation rate in Sudan for the year 1996:

Source: Central Bureau of Statistics

This rate was heading towards deepening the excessive inflation rate to levels that had not occurred before. In view of the economic situation prevailing in the period 1989 to 1996, it was expected that if the inflation rate proceeded at this speed, it would reach 300% by the end of the year 1996. Therefore, treatments must be taken to confront this deterioration.

In April 1996, the Ministry of Finance faced crises from all economic aspects, the most important of which were ⁽¹²⁾:

1. 1. Low economic performance between (4%-5%) of the total macroeconomic indicators and the rise in inflation rates to unprecedented levels (162% in July 1996).
2. 2. An unstable and unreal exchange system and a deterioration in the current account, as the deficit reached about (20-25%) and the level of maturity for external debt services reached about (180%) of the current receipts annually.

The economic policies that aimed to control the high rates of inflation in 1996 were represented in the following ⁽¹²⁾:

1. 1. Stop all kinds of extra-budgetary spending.
2. 2. Cancellation of ministries’ authorization to dispose of their revenues without referring to the Ministry of Finance.
3. 3. Reducing the amount of borrowing from the banking system.

4 . Controlling the cash flow pumped by commercial banks by raising reserves and tightening supervision over banks’ performance to ensure that funding is limited to the specified ceiling.

5 . Suspending all types of customs and tax exemptions that are not sanctioned by laws. As a result of these policies, inflation rates witnessed a noticeable decline (from three decimal places to one decimal place during the period from (1997-1998-1999), as shown in the Table: (3.2)

Inflation in Sudan during the period (1979-2017)

annual inflation:

Source: Central Bank of Sudan reports.

 Table (3/2) shows the inflation in Sudan for the period from 1979-2017, as the highest inflation rate was in the year 1996 and the lowest inflation rate in the year 2001 was 4.9%. In general, the inflation rates increased in the first period of the time series and decreased in recent years due to income Petroleum in the economy. In addition to some reform and structural policies in the Sudanese economy, also entering into short and medium-term external commitments to finance projects that are not economically feasible, in addition to cash and commodity loans that were employed in the areas of consumption and current spending. These commitments were beyond the country’s capacity, which made the state unable when it was paid, debts accumulated until they reached more than 23 billion dollars in the year 2000 ⁽¹³⁾.

Inflation rates began to decline until it reached 4.9 in the year 2001 and is considered the lowest level of the inflation rate. The reason is due to the production and export of oil, which affected the rates of the gross domestic product, the exchange rate and the balance of payments and in turn affected the inflation, and in the year 2002 the inflation rate rose to 8.5 and returned once Another decrease in the year 2003 was 7.4, then it rose again in the year 2004, and the inflation rate reached 8.7.

This period witnessed many political and economic events in Sudan. After the peace agreement in 2005, inflation rates began to decline, in the years (2006-2007), when inflation rates decreased to (7.3, 8.1), respectively.

As for the year 2008, the global financial crisis occurred, and Sudan, like other countries, was affected by it, which led to a rise in the inflation rate this year to (14.3). In 2009, the government took the necessary economic policies to control the money supply and reduce the inflation rate, which decreased to (11.2) in 2009. As for the period from 2010 to 2013, the inflation rates increased dramatically, reaching (13, 45.0, 49.0, 37.1%), respectively. The main reason for this rise in inflation rates was the secession of the south and the exit of oil as a main source of state revenues, as it represented 70% of state revenues (and more than 90%) the contribution of oil to Sudanese exports (12). It is noted that the inflation rates decreased in the years 2014 and 2015, respectively (25.7%, 12.6%), and the rate returned to rise in the years 2016 and 2017, respectively (30.3, 32.4 %).

Figure (3/2) Inflation in Sudan 1979-2017.

Source: Prepared by the researcher from table (3/2) data using Excel 2019

The relationship be tween the exchange rate and inflation in Sudan 1979-2017

 Figure (3/3) The exchange rate in Sudan 1979-2017

   pound/dollar

Source: Prepared by the researcher from the data in Table (1/3) using Excel 2019 program.

The exchange rate in Sudan 1979-2017 pound/dollarFigure (3/3) and Figure (3/4) show the relationship between the exchange rate and inflation in Sudan in the period from 79-2017, where it is noted that the highest inflation rate was in 1996 at a time when the exchange rate was low, and the reason for this is due to Many local, regional and international economic and political variables, the most important of which was the economic blockade that Sudan was subjected to during that period, and the suspension of all loans and financial and investment aid from international financial institutions and major companies, which led to thinking about developing an economic treatment for that period through economic structural policies For a period of three years applied by the Ministry of Finance.

Reasons of high inflation in Sudan:

1. Increasing investment expenditures: Since the beginning of the seventies, with the beginning of the May era, the regime was inclined in its directives to the socialist system, as the authority at that time increased government economic development projects in a large and unstudied way. The occurrence of these projects coincided with the occurrence of the so-called oil war between The oil-exporting countries and the major industrialized countries. Sudan, like other developing countries, is suffering from importing high-priced petroleum products. Production inputs from high-priced industrial countries, all of which was directly reflected in the establishment of these projects and contributed to the failure of many of them. Inflation is considered when development projects are established as a natural economic phenomenon, but the failure of these projects due to these internal and global variables and the demand of all these sectors for full wages and high-priced raw materials. The inaccurate study of the establishment of these projects led to a widening of the gap between the amount of money in circulation and the goods and services produced, and accordingly increased Money supply without an increase in goods and services, which led to the emergence of inflation ⁽¹³⁾.

2- Government indebtedness from the banking sector: After inflation reached its highest level in the year 1996, the authorities worked to follow financial and monetary policies to curb the phenomenon of inflation.  This was clearly reflected in the general trend of the inflation rate as it continued to decline. In the year 1999, the year of the beginning of production and export of Sudanese oil, which changed the structure of the Sudanese economy at the level of internal production and at the level of its foreign trade. Sudan turned into an oil-producing country after it was an importing country for oil needs, and with the entry of oil into budget revenues for the first time. A surplus was recorded in relation to total expenditures.

 Thus, the export of oil provided foreign exchange for the economy, which strengthens the value of the national currency, which would reduce the rate of inflation due to the inverse relationship acquired between the value of the national currency and inflation in the economy. It is worth noting that the exit of Sudanese oil to international markets resulted in the provision of foreign   currencies, which made inflation continue to decline, as it reached its lowest level in 2001 ⁽¹²⁾.

After the signing the Naivasha Peace Agreement in southern Sudan, Sudan witnessed stability that it had never seen before, which made foreign capitals flow into Sudan for investment, which led to a decrease in inflation rates. Sudan witnessed stability in various aspects of economic and political life until the year of the referendum, 2011, as an entitlement and complement to the Naivasha Agreement. The result was that the people of the south chose to secede and form a state of their own. This would cause Sudan to lose the oil resources extracted from the lands that lie within the borders of the new state. In order to face the repercussions of the separation, the government developed the so-called three-year program for the fiscal years (2012-2014), one of its main objectives was to reduce the volume of government spending by 45% during the program period. But as usual, the opposite happened.

Only the budgets of those years increased the current government spending by 70% than it was when the south seceded in July 2011. While spending on development remained a foregone conclusion on the public spending agenda, one of the most prominent negative repercussions of this approach to spending was the rise in inflation rates, which doubled from 18% in 2011 to 36.4% in 2014. And the trade balance deficit grew, which rose from $300 million in 2011 to $3.3 billion in 2014, because the government is the largest importer, which increased pressure on the foreign exchange market, because the secession caused Sudan to lose $6.6 billion in oil exports, according to government statistics.

We note that the inflation rate in Sudan is directly linked to the political events that occur in Sudan, with evidence that any change that occurred on the Sudanese political scene is offset by a change in the general trend of the inflation rate. There are also internal and external economic, political and social factors and variables that have an impact on the rise in inflation rates in Sudan during the period from 1979 – 2017 ⁽¹²⁾.

 3 – Economic factors and variables, the public sector dominated the economic performance in the early nineties before switching to a free market system, which led to the widening and increasing of the public budget deficit, and consequently the state resorting to borrowing from the banking system and printing and pumping currencies that have no equivalent, which led to an increase in the monetary mass. Thus, the demand for goods and services increases in light of the decline and deterioration of supply represented in the deterioration and suspension of many agricultural and industrial projects due to the high cost of production.

It is also noted that the periods that witnessed a decrease in inflation levels are related to the period of entry of oil revenues, which led to a reduction in the government’s debt from the banking system to fill the public budget deficit, in addition to the weakness and suspension of foreign loans due to the economic blockade imposed by the countries of the Western world on Sudan ⁽¹²⁾. The result was that the people of the south chose to secede and form a state of their own. This would cause Sudan to lose the oil resources extracted from the lands that lie within the borders of the new state. We note that the inflation rate in Sudan is directly linked to the political events that occur in Sudan, with evidence that any change that occurred on the Sudanese political scene is offset by a change in the general trend of the inflation rate. There are also Political factors: The political and economic blockade of Sudan and the suspension of loans and foreign investments for political reasons and decisions.

As well as the political hostility between the regime and civil society organizations and political parties, which prompted the government to follow the policies of temptation and polarization for these parties by creating fictitious jobs that entail financial obligations that are not matched by real production or real contribution to the national output and income.

Fourth axis: Analytical framework

To perform the hypothesis analysis: There is a direct statistically significant relationship between the exchange rate and inflation using the following equations: internal and external economic, political and social factors and variables that have an impact on the rise in inflation rates in Sudan during the period from 1979 to 2017 ⁽¹²⁾.

 3 – Economic factors and variables, the public sector dominated the economic performance in the early nineties before switching to a free market system, which led to the widening and increasing of the public budget deficit, and consequently the state resorting to borrowing from the banking system and Printing and pumping currencies that have no equivalent, which led to an increase in the monetary mass thus, the demand for goods and services increases in light of the decline and deterioration of supply represented in the deterioration and suspension of many agricultural and industrial projects due to the high cost of production.

 It is also noted that the periods that witness a decrease in inflation levels are related to the period of entry of oil revenues, which led to a reduction in the government’s debt from the banking system to fill the public budget deficit, in addition to the weakness and suspension of foreign loans due to the economic blockade imposed by the countries of the Western world on Sudan ⁽¹³⁾. Political factors: The political and economic blockade of Sudan and the suspension of loans and foreign investments for political reasons and decisions. As well as the political hostility between the regime and civil society organizations and political parties, which prompted the government to follow the policies of temptation and polarization for these parties by creating fictitious jobs that entail financial obligations that are not matched by real production or real contribution to the national output and income.

 To perform the hypothesis analysis: There is a direct statistically significant relationship between the exchange rate and inflation using the following equation:

 ……………. (5)

       2.179011,    0.295317

Prob.     (0.0364)     (0.7695)

Economic Measure: The estimated coefficient α ̂_1 0.096719 is positive, indicating that the relationship is direct between the exchange rate and inflation. And that the devaluation of the Sudanese currency against the dollar leads to an increase in inflation rates. A reduction of one pound leads to an increase in inflation by 0.0967

The estimated coefficient α ̂_2 0.000122 with a positive sign indicates a positive relationship between the exchange rate and real GDP, but it is weak.

Statistical Measure:

individual moral: Individual morality was tested by .t .test

Morale 〖 α ̂〗_1:

H_0= α_1=0

H_1= α_1≠0

The corresponding probability t-statistic for the estimated parameter 〖 α ̂〗_1 is (0.0364) which is less than 5%. Which means that the parameter 〖 α ̂〗_1 is significant. This indicates the importance of the exchange rate in influencing inflation.

Morale 〖 α ̂〗_2:

H_0= α_2=0

H_1= α_2≠0

There is no statistically significant relationship between the exchange rate and real (GDP) because the probability value corresponding to the t-statistic corresponding to the parameter that explains the effect of exchange rate fluctuations on real GDP is 0.7695

It is greater than 5%.

The coefficient of determination R².:

The coefficient of determination is 0.59, meaning that 59% of the changes that occur in inflation are attributable to the exchange rate and real GDP. While 41% of the changes that occur in inflation are due to other variables not included in the model.

Modified coefficient of determination R ̅ ².:

The adjusted coefficient of determination is 0.56, meaning that 56% of the changes that occur in inflation are attributable to the exchange rate and real GDP. The modified determination rate excludes the inflation present in the coefficient of determination.

Econometrics Measure: There is no autocorrelation problem in the model because the statistical value of DW = 2.387 approaches the number 2.

Granger causality test: Granger (1969) proposed a criterion for determining the causal relationship that is based on the relationship between two time series Y2t and Y1t The dynamics that exist between time series, where if Y1t and the series t, express the development of two different economic phenomena over time, Y2t contains the information through which it can be improved Expectations for the series In this case then we say about a causal variable if it contains information Y2t causes Y1t we say it helps to improve the expectation of another variable Granger test is used to ascertain the extent to which there is a feedback or feedback relationship or a correlation between two variables, in If time series data exists.

                                            Source: researcher program outputs

From Granger’s result above for causation testing, we note that exchange rate changes cause changes in inflation rates during the study period because the corresponding probabilistic value of the F statistic (0.0192) is less than 5%.

There is a direct relationship between the foreign exchange rate and inflation, so that the higher the foreign exchange rate, the higher the rates of inflation automatically and directly. The study proved that there is an effect of exchange rate fluctuations on the gross domestic product (GDP). The paper also recommended the following: Continuing to follow the policy of the managed flexible exchange rate to eliminate the parallel market, and to strengthen and support the official market.

 Attracting the savings of workers abroad, encouraging them and tempting them with remunerative prices. Attracting capital abroad and encouraging foreign direct and indirect investment by simplifying procedures, unifying the investment window and facilitating transfer procedures. The authorities should find a mechanism to reduce inflation rates and adopt a flexible and balanced monetary policy. Maintain reserves of foreign exchange and a base of gold to maintain.

Conclusion

The study aimed to know the impact of foreign exchange rate fluctuations on inflation using standard quantitative analysis. Price stability, economic stability, and maintaining the real value of the local currency against foreign currencies.  So, the results of the study were as follows: To follow the policy of a flexible managed exchange rate to eliminate the parallel market, and to strengthen and support the official market. Attracting the savings of workers abroad, encouraging them and tempting them with remunerative prices. Attracting capital abroad, encouraging foreign investment  on the external account ⁽¹²⁾.

The paper also found out the most important results: by using the factors that deal with the exchange rate by finding a mechanism to unify the price in the manner of the managed flexible exchange rate to eliminate the parallel market, and to strengthen and support the official market. Attracting the savings of workers abroad, encouraging them and tempting them with remunerative prices. Attracting capital abroad and encouraging foreign direct and indirect investment by simplifying procedures, unifying the investment window, and facilitating transfer procedures. It is recommended by the study that to continue to follow the policy of the flexible managed exchange rate. The authorities should find a mechanism to reduce inflation rates. Adopt a flexible and balanced monetary policy. Maintain reserves of foreign exchange and a base of gold to maintain the required balance.

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5. 5. The Malak Medal (2001): Critical phenomena at the international level, Al Manhal Lebanese, first edition, Beirut, Lebanon, p. 293.
6. 6. Mustafa AbdelRaouf Abdel Hamid Hashem (2002): Monetary policy in light of the different exchange systems in developing countries, The Scientific Journal of Economics and Trade, Second Edition, Faculty of Commerce, Ain Shams Friday, Cairo, p. 246.
7. 7. Nashat al-Wakeel (2006): Monetary Balance and Exchange Rate, Comparative Analytical Study of the Money Market and Exchange Rate, First Edition Cairo, p. 23.
8. 8. Salah El-Din Hassan El-Sisi ,The European Union and the Single European Currency 13(Euro), The Arab Common Market, Reality and Ambition, World of Books, undated, p. 44.
9. John Hudson, Mark Hernder(1987): aforementioned reference, 1407 AH – p. 146.
10. 10. Mustafa Abdel-Raouf Abdel Hamid Hashem (2002): Monetary policy in light of the different exchange systems in developing countries, The Scientific Journal of Economics and Trade, Second Edition, Faculty of Commerce, Ain Shams Friday, Cairo, p. 246.

11Nashat al-Wakeel (2006): Monetary Balance and Exchange Rate, Comparative Analytical Study of the Money Market and Exchange Rate, First Edition Cairo, p. 35.

.     12.  Salah El-Din Hassan El-Sisi, The European Union and the Single European Currency      (Euro), The Arab Common Market, Reality and Ambition, The World of Books, undated, p. 44.

13. 13. Ibtisam Muhammad Abdul-Baqi Abdullah (2021), analysis of the causal relationship beten the exchange rate and the general level of prices using the ARDL model – a case study of Sudan during the period (1989-2018). Al-Qalzam International Scientific Journal, the comprehensive court, Al-Manhal Academy of Sciences, Sudan. The tenth issue, December 2021 – Safar 1443 AH.

.14.Salah Mohamed Ibrahim Ahmed (2021), the impact of the Sudanese Hannah exchange rate policies on consumer prices and inflation rates – an applied study of Sudan during the period (1980-2014), White Nile Journal for Studies and Scientific Research, semi-annual court, issue March 17, 2021.P162, 190.