The Impact of Exchange Rate on GDP: In Case of Tajikistan
Parviz Gafurov
a
, Firuz Kodirov
b
and Shahriyor Turakhonzoda
c
The Tajik state University of Finance and Economics, Nakhimov Str. 64/1, Dushanbe, 734067, Tajikistan
Keywords: Exchange Rate, GDP, Economic Growth, OLS, Real Exchange Rate, Real Effective Exchange Rate,
Investment.
Abstract: The purpose of the study is to identify and build a model of the impact of the exchange rate on GDP of the
Republic of Tajikistan. According to the goal, the model was developed based on the current situation in
Tajikistan by selecting the main influencing factors. To build the model, GDP was used as an endogenous
variable, and the real effective exchange rate and investment were used as exogenous variables. According to
estimates, the result of the model shows that the economic growth of the Republic of Tajikistan reaches 7%
on average, of which about 0.17% is due to the increase of the real effective exchange rate.
1 INTRODUCTION
In a market economy, the stability of monetary policy
is the most important indicator of the welfare of the
state and the population. In order to increase the
effectiveness of monetary policy and socio-economic
development of the Republic of Tajikistan, the
National Strategy and Development of the Republic
of Tajikistan (NDS) for the period up to 2030 defines
the main tasks related to monetary policy and presents
an analysis of the current state, as well as directions,
stages and terms of implementation of future reforms:
strengthening the role and capacity of the National
Bank of Tajikistan in the area of monetary policy
management; the implementation of a comprehensive
monetary operation and the creation of a stable state
of foreign exchange policy (NDS, 2016).
Regulation and supply of money supply in the
economy and maintenance of price stability are the
main objectives of the monetary policy of the
Government of the country. In theory, the national
regulator should implement acceptable policies to
activate sectors of the economy for sustainable
growth (Paun et al., 2019). Thus, exchange rate policy
is one of the main elements of monetary policy, which
regulates inflation, the interest rate, the exchange rate
of the national currency, the money supply, the level
a
https://orcid.org/0000-0002-8764-6394
b
https://orcid.org/0000-0003-4564-630X
c
https://orcid.org/0000-0002-0596-3231
of international reserves and the competitiveness of
domestic goods.
Currently, in the Republic of Tajikistan, the issues
of the impact of the exchange rate on the gross
domestic product (GDP) play an important role in the
real and monetary sectors. Economic issues related to
the dynamics of the exchange rate have become one
of the main problems that dominate in
macroeconomic studies of the last period. Some
scientists argue that the economic crisis in developing
countries is caused directly or indirectly by the
incorrect choice of exchange rate policy, which is one
of the key tasks for ensuring the stability of
production (Reinhart, 2002; Camba-Crespo, 2021;
Krugman, 2014).
Thus, it is relevant to study the impact of the
exchange rate and its volatility on the economic
growth rate of Tajikistan, depending on the country's
monetary policy.
2 REVIEWS OF LITERATURE
The impact of the exchange rate on GDP should be
studied based on the economic system of the country,
since the relationship of these indicators varies
depending on the economies of countries. Therefore,
240
Gafurov, P., Kodirov, F. and Turakhonzoda, S.
The Impact of Exchange Rate on GDP: In Case of Tajikistan.
DOI: 10.5220/0011348800003350
In Proceedings of the 5th International Scientific Congress Society of Ambient Intelligence (ISC SAI 2022) - Sustainable Development and Global Climate Change, pages 240-247
ISBN: 978-989-758-600-2
Copyright
c
2022 by SCITEPRESS Science and Technology Publications, Lda. All rights reser ved
several theoretical analyzes of the impact of the
exchange rate on GDP have been considered.
According to the study Fofanah (2020), the impact
of exchange rate volatility on economic growth is
insignificant. It should be noted that the study was
based on data from WAMZ countries. But studies
have shown that there is a positive and significant
relationship between exports and economic growth.
According to this study, the relationship between
imports and GDP growth rates is also positive and
significant.
An increase in the real exchange rate reduces the
efficiency of exports, causes an increase in imports
and prices for imported goods, or negatively affects
the competitiveness of national goods in foreign and
domestic markets, and increases the production of
non-tradable goods (Davlyatov, 2011). This study
analyzes the purchasing power of the national
currency in a small open economy of the Republic of
Tajikistan. Based on this, the author has determined
the relationship between the internal and external
markets on the basis of the real effective exchange
rate (REER).
The relationship between exchange rates and FDI
in Vietnam for the period 2005–2019 based on the
vector autoregression (VAR) model, have been
studied by Huong et al. (2020) and three main results
have been obtained. First, there is a positive causal
relationship between FDI and Real Effective
Exchange Rate (REER). Second, trade openness has
a positive impact on FDI and REER. Third, economic
growth has an impact on REER but did not impact on
FDI.
The economic literature notes that the
depreciation of the real exchange rate plays an
important role in increasing the competitiveness of
international prices, but this indicator will not be able
to determine the volume of production. The function
of the real exchange rate is the measurement of
domestic prices in relation to foreign ones. It also
shows a decrease or increase in the competitiveness
of tradable goods, for example, a decrease in the real
exchange rate in the short term contributes to an
increase in the export of domestic goods. Indeed,
improving competitiveness is an important part of the
money transmission mechanism.
In the long term, changes in real exchange rates
are driven by fundamental factors such as shifts in
productivity and the terms of trade: they are
endogenous and independent of monetary policy.
This does not mean that government policy cannot
indirectly influence the real exchange rate. However,
only government policies aimed at changing the real
economy will sustainability affect the real exchange
rate. Therefore, efficiency gains that increase the
tradable sector's ability to attract resources from
competing sectors (domestic and foreign) will drive
an appreciation of the real exchange rate, however
defined.
For the development of the economy of
Tajikistan, export is the main source of foreign
exchange (Tursunov, 2017). This suggests that in the
socio-economic policy of the Republic of Tajikistan,
much attention is paid to the development of the
export sector by creating a favorable environment for
the development of industrial production, considering
the choice of monetary policy.
It should be noted that Evans and Saibu (2017) in
their studies in case of Nigeria assess the impact of
monetary and exchange rate policies on the
diversification of the economy using the ARDL
(Autoregressive Distributed Lag) approach. His
results show that the relationship between the
exchange rate and economic diversification is
statistically significant. In addition, monetary policy
instruments, in terms of money supply and credit,
have a significant impact on the diversification of the
economy. Thus, they recommend that it is possible to
maintain the value of the national currency, to ensure
the internal and external balance without prejudice to
the overall goal of diversifying the economy.
Enu and Opoku (2013), having studied the
relationship between GDP growth and the exchange
rate in the case of Ghana for the period from 1980 to
2012, estimated linear regression using OLS
(Ordinary least squares method). They used statistical
methods of autocorrelation, heteroscedasticity, and
multicollinearity, and, as a result, they obtained a
positive linear relationship between the GDP growth
rate and the exchange rate. This confirms the theory
that high exchange rate depreciation stimulates
economic growth in the short term. Their results are
also consistent with the conclusions of Tarawalie
(2010) and Chen (2012). They propose that
politicians should ensure long-term stability of
monetary and fiscal policy, and should also continue
to engage in productive activities in order to increase
a country's exports more than its imports.
Rizokulov and Azizbayev (2018) in their works
propose that “after legislative amendments and
measures taken to stabilize the foreign exchange
market, the volume of dollarization decreased only
due to the fact that it moved from official sources,
such as credit institutions, to the unofficial sphere,
namely, to the shadow economy. They note that in
order to achieve import substitution, it is necessary to
take into account the factor as a result of which, due
to the outflow of capital, domestic production will
The Impact of Exchange Rate on GDP: In Case of Tajikistan
241
develop”. Based on this, it can be argued that today
the exchange rate is one of the important factors in the
development of the real sector of the economy.
The results obtained by Huong (2019) showed
that the real exchange rate can lead to a positive effect
on real GDP. Empirical studies (Conrad, et al., 2018)
for the Trinidad and Tobago economy over the period
1960 to 2016 have shown that undervalued exchange
rates have a positive impact on economic growth and
overvaluations have a long-term negative impact.
According to the Krekó and Oblath (2020) research,
the relationship between economic growth and RER
misalignments within the EU during the period of
1995–2016 has been identified.
Thus, there are many studies that suggest a
correlation between the real exchange rate and GDP
growth (Alidzhanov, 2016; Ashurov and Safarov,
2019). As long as productivity in the tradable sector
is higher, countries have an incentive to keep the
relative price of tradable goods high enough to make
it attractive to move resources into their production.
Consequently, a low real exchange rate is required to
support the production of tradable goods.
It should be noted that the impact of the real
exchange rate on economic growth per capita in the
medium term is still unresolved.
3 DATA AND METHODOLOGY
Currently, in conditions of economic instability, the
exchange rate is a key indicator of economic
development, especially in the external sector of the
economy, and managing it is one of the main goals of
the country's monetary and foreign exchange policy.
In this context, the effective management of the
national currency is timely, which affects the growth
of inflation, trade balance, capital, financial stability
and the country's economy as a whole. Despite being
unstable due to external economic and financial
shocks, the structure of the economy of the Republic
of Tajikistan is mainly focused on import
substitution, since the traded goods of domestic
producers are closely related to the purchasing power
of the national currency.
To achieve the NDS goals until 2030, it is
necessary to determine the impact of exchange rate
dynamics on economic growth, which is one of the
main tasks of the state and creates favorable
conditions for the development of domestic
production, which can help create sustainable
employment and the development of the country's
economic sector.
Therefore, given the use of the real effective
exchange rate indicator, the NBT can ensure efficient
and optimal allocation of foreign exchange to the
private sector.
Maintaining the growth of production, the choice
of the exchange rate regime, is an important issue of
monetary policy. Consequently, according to the IMF
methodology for managing the foreign exchange
market of the Republic of Tajikistan, the exchange
rate classification system was implemented in order
to regulate the exchange rate.
The choice of the exchange rate regime and
foreign exchange transactions in the country also has
implications for the economic growth of the Republic
of Tajikistan (Khikmatov and Sayfullozoda, 2019).
As noted, the impact of monetary policy in the
real sector of the economy occurs through the money
supply. To assess the velocity of money circulation,
the theory of the amount of money was used
(Keynes, 2018).
Monetary policy cannot directly control prices,
and its impact is associated with increased volatility
in interest rates, which lead to increased demand for
money, and a lack of money supply. The mechanism
of influence of monetary policy is associated with the
growth rate of the money supply and the activation of
the interest rate. As a result, it affects the equilibrium
of the real effective exchange rate. The money that is
not in the banking system can cause inflation to rise.
Therefore, the real effective exchange rate is a key
relative price in the economy, which gives economic
agents signals on how to optimally use factors of
production between goods and the provision of
services. In addition, the real effective exchange rate
shows how the structure of the economy should adapt
to the external environment in the medium term.
Unlike bilateral nominal exchange rates, the real
effective exchange rate is not directly observable,
highlighting the need for valuation techniques to
calculate it.
In this analysis, the estimated REER was used as
an exogenous variable. It should be noted that the
methodology for calculating this indicator is given in
more detail in the work of Turakhonzoda et al. (2017).
According to theoretical analysis, the impact of
the exchange rate on GDP should be significant, but
in the case of Tajikistan, the impact of the exchange
rate on GDP is insignificant. Therefore, the real
effective exchange rate was used as an influencing
factor due to its high impact on GDP.
Consequently, in addition to the REER, the
economy of Tajikistan is highly dependent on
investment, which has a significant impact on GDP
growth.
ISC SAI 2022 - V International Scientific Congress SOCIETY OF AMBIENT INTELLIGENCE
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Table 1: Statistics of Macroeconomic Indicators.
Indicators 2001 2005 2010 2015 2016 2017 2018 2019
GDP (mln. TJS) 12601.8 17938.7 24704.7 34650 37057.9 39670.8 42447.7 45900.5
Investment (mln. TJS) 155.2 623.4 5891.6 13973.9 16944.1 20398.4 24200 25783.9
Therefore, an equation was created to show the
functional relationship of real GDP (base year 2010)
with REER and investment (base year 2010) based on
historical data (Table 1).
Real GDP was used as an endogenous variable,
and REER and investment were used as exogenous
variables (equation 1).
𝑌𝛼𝛽
𝑅𝐸𝐸𝑅  𝛽
𝐼𝑒, (1)
where, Y- real GDP, REER- real effective
exchange rate, I-investment.
For the period 2008, 2013-2014 and 2016
weighted relative prices declined relative to foreign
prices, stimulating domestic producers. Therefore,
between 2009 and 2012 there is an increase in REER
at the level of 101.64%. After this period, since 2013,
the volatility of this indicator of ±10% has been
observed (Figure 1). It should be noted that the main
influencing factors that lead to the volatility of the
REER are the global financial crises.
*
Source: author's calculation according to the official data of
the Statistical of the Republic of Tajikistan
Figure 1: GDP in constant prices and REER for the period
2001-2019.
The REER trend shows that for the periods 2002-
2007, 2008-2009. and 2015-2017 weighted relative
prices were strengthened against foreign currencies,
so it can be argued that domestic producers were
uncompetitive in the domestic and foreign markets
(Figure 1).
Since 2015, the structure of exports has changed
significantly and has led to an increase in exports. The
reason for the increase in exports is the positive
change in tradable commodities such as minerals,
electricity and cement (Table 2).
Table 2: Structure of Exports by commodity (2001 to 2019).
Export
structure
2010
2015
2016
2017
2018
2019
Aluminum
primary,
%
62 24 23 17 18.6 15
Ore
concentrat
es, %
- 17 27 33 37.3 25
Cotton
fibe
r
, %
17 16 14 10 15.4 12
Electricity,
%
- 6 6 5 7.2 8
Cement, % - 0.0
1
2 4 6.1 5.8
Other
goods, %
21 37 28 31 15.5 34
Total, % 100 100 100 100 100 100
Table 2 shows that aluminum production
decreased from 398.4 million USD in 2001 to 173.2
million USD in 2019, and in recent years there has
been an increase in ore concentrates, reaching up to
296.9 million USD in 2019, and cement production
increased to 68.1 million USD in 2019.
In order to assess the reason for the change in the
structure of exports and the impact of the exchange
rate on economic growth, the real effective exchange
rate can be used as an influencing factor.
The change in the volume of exports over the past
5 years has reached an average of 7.3%. It should be
emphasized that in 2018, compared to 2017, it
decreased by 10%, and compared to 2015, it
increased by 21%, and the change in the volume of
imports increased from 2,564.9 million somoni in
2002 to 14,004.9 million somoni in 2008 and 26676.2
million somoni in 2014.
According to the REER and export trends for the
period 2016-2019. it can be argued that the real
effective exchange rate stimulated the turnover of
The Impact of Exchange Rate on GDP: In Case of Tajikistan
243
domestic producers and led to an increase in exports
(Figure 2).
The appreciation of the real exchange rate in cases
of high inflation has a negative impact on the current
account, as real effective exchange rate indices are
weighted averages of exchange rates that show
fluctuations in the bilateral nominal or real exchange
rate.
*
Source: author's calculation according to the official data of
the Statistical of the Republic of Tajikistan
Figure 2: Export growth rate (million TJS) and REER
growth rate (2002-2019).
Figure 2 shows that changes in exports and REER
in 2008, 2013, 2014 and 2018 are negative, while in
other years these indicators are positive. This means
that changes in export growth rates are closely related
to REER growth rates. Thus, it was revealed that the
rate of change of the real effective exchange rate
reaches ±10%.
*
Source: author's calculation according to the official data of
the Statistical of the Republic of Tajikistan
Figure 3: Import growth rate (million TJS) and REER
growth rate (2002-2019).
And also, the change in the REER has a
significant impact on the rate of change in imports.
Figure 3 shows that the dynamics of changes in
imports is gradually declining. It should be noted that
the trend of changes in exports and imports in 2009
and 2015 is opposite to the change in REER. It
follows that there are two main factors influencing the
growth of imports, these are the growth of domestic
demand and changes in relative prices. In this case,
the part of imports that depends on changes in relative
prices is considered through the REER. However, the
other part of the change in imports depends on
aggregate demand. Depending on the trend in imports
and REER, it can be argued that these indicators are
closely related.
Descriptive statistics were calculated for the
selected indicators, which have the following
properties (Table 3).
Table 3: Descriptive Statistics.
RGDP_2010 REER I
Mean 27695.44 92.11610 7117.791
Median 25618.75 91.86352 6264.306
Maximum 49113.52 109.4057 16371.93
Minimum 12601.80 68.21631 762.9205
Std. Dev. 11005.29 12.66114 4944.509
Skewness 0.434314 -0.507209 0.435215
Kurtosis 2.070750 2.189427 2.023606
Jarque-
Bera
1.348351 1.405062 1.425829
Probability 0.509577 0.495330 0.490213
Sum 553908.8 1842.322 142355.8
*
Source: author's calculation according to the official data of
the Statistical of the Republic of Tajikistan
Based on the descriptive statistics obtained, it can
be argued that Skewness (skewness coefficients) give
a measure of how symmetrical the observations are
around the mean. For a normal distribution, the
skewness is zero. In our case, the distribution of
RGDP_2010 and I has a positive skewness, i.e. the
distorted one is on the left, while the REER
distribution has negative skewness and the distorted
one is on the right.
Another indicator Kurtosis (coefficient of
kurtosis) shows that all the selected indicators in the
Table 3 have a flat-topped distribution.
To validate the tests of the normal distribution of
the time series, we need to take into account the
Jarque-Bera test and its Probability. These statistical
tests in our case indicate the possibility of a normal
distribution.
As a result, after checking the descriptive
statistics, we can use this data for analysis.
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4 EMPIRICAL RESULTS AND
DISCUSSIONS
It should be noted that before performing the
regression analysis, we will check the relationship
between the selected variables (Table 4).
Therefore, the correlation between REER and I is
0.86, which indicates the absence of multicollinearity.
Table 4: Correlation of the Selected Indicators.
RGDP_2010 REER I
RGDP
2010
1.000000
REER
0.858732 1.000000
I
0.988896 0.860068 1.000000
*
Source: author's calculation
Thus, we can use the selected indicators in the
equation. As a result of the regression analysis, we got
the following result (equation 3).
𝑅𝐺𝐷𝑃

172.5503 𝑅𝐸𝐸𝑅 1.60226
𝐼 𝐴𝑅1 0.63486 (3)
where, RGDP_2010-GDP (in constant price,
2010) and I-Investment (in constant price, 2010).
The coefficients of equation (3) shows that if the
REER increases by 1%, then real GDP in national
currency will increase by 172.55 million TJS, and if
investments increase by 1 million somoni,
respectively, GDP will increase by 1.6 million TJS. It
can be expected that, other things being equal, in a
country with a positive rate of change in the real
effective exchange rate, the depreciation of the
national currency will lead to an increase in the rate
of economic growth. And the depreciation of the
exchange rates of a country with a negative rate of
change in the real effective exchange rate can
negatively affect the foreign trade balance, which
impedes GDP growth. In fact, exchange rate
fluctuations have an impact on growth effects,
especially when the national currency depreciates.
Although this is indeed what we found in this
regression, i.e. the real exchange rate ratio has a much
greater impact on economic growth than other
factors.
Table 5 indicates that based on exogenous
variables (real effective exchange rate, investment),
GDP is predicted in real terms. The coefficient of
determination R2 is 0.97, which describes the quality
(accuracy) of the constructed regression model, and
the higher this indicator, the better the model
describes the initial data.
Table 5: Model Results.
Dependent variable: RGDP_2010
Variable Coefficient Std.
Erro
r
t-
Statistic
Prob.
REER 172.5503 26.14827 6.598917 0.0000
I 1.602256 0.281287 5.696171 0.0001
AR (1) 0.634863 0.236063 2.689378 0.0176
R-squared 0.972526 Mean dependent var 26252.53
Adjusted
R-s
q
uare
d
0.968601 S.D. dependent var 8831.200
S.E. of
regression
1564.873 Akaike info
criterion
17.70778
Sum
squared
resi
d
34283593 Schwarz criterion 17.85482
Log
likelihoo
d
-147.5161 Hannan-Quinn
criter.
17.72240
Durbin-
Watson
stat
1.631790
Inverted
AR Roots
.63
*
Source: author's calculation
Other statistics, such as the t-statistic, state that the
coefficients of the equation are significant and reject
the null hypothesis. In general, based on the result of
equation (3), it is possible to predict the GDP of the
Republic of Tajikistan in the medium term.
The result of the evaluation test for equation (3)
for real GDP, real effective exchange rate, and
investment using the adjustment process is shown in
Figure 4.
*
Source: author's calculation according to the official data of
the Statistical of the Republic of Tajikistan
Figure 4: Result of the Model of the Impact of the Exchange
Rate on GDP growth in the Republic of Tajikistan (for the
period 2001-2018).
A consequence of the analysis result for policy
formulation is that the government can provide access
to foreign exchange, especially for goods and services
that cannot be produced in the country.With the
establishment of an exchange rate, which is
The Impact of Exchange Rate on GDP: In Case of Tajikistan
245
exogenous, the inflation rate, the level of exports and
imports will be decided by the model as a target for
monetary policy. In addition, our economy is also
dependent on investment, and this factor was also
included in the model.
Accordingly, the forecast for real GDP growth
was obtained depending on the real effective
exchange rate and investment (Figure 5)
*
Source: author's calculations using annual statistics from the Agency for Statistics under the President of the Republic of
Tajikistan and the National Bank of Tajikistan.
Figure 5: GDP growth rates and Model Results (forecast for 2025).
5 CONCLUSIONS
Based on the analysis, it was revealed that there is a
positive relationship between the real exchange rate
and the growth of gross domestic product. In recent
years, due to the global financial crisis, managing
daily fluctuations in the exchange rate of the national
currency has made it difficult to apply the objective
of monetary policy. In this regard, the impact of the
monetary policy of the Republic of Tajikistan on the
real sector of the economy was determined by
choosing the exchange rate regime. Since the role of
monetary policy in sustainable growth is price
stability, monetary policy cannot directly control
prices and its influence occurs through increased
volatility of interest rates, which, as a result, lead to
an increase in the demand for money and a shortage
of money supply. It is known that in a developing
economy, the growth rate of money demand is faster
than the growth of gross domestic product and this
leads to an increase in the growth rate of money
supply and activates the growth of the interest rate.
Therefore, the Central Bank can achieve its goal in
the process of determining inflation through the effect
of the mechanisms of influence of monetary policy
The result of the analysis, using the real effective
exchange rate, which is periodically assessed by the
NBT, can ensure efficient and optimal allocation of
foreign exchange to the private sector. In addition,
this strategy can help create sustainable employment
and the development of a country's economic sector,
which can often serve as an engine of growth and
development.
Based on the obtained model results, it can be
argued that the proposed methods and approaches for
econometric modeling of the impact of the national
currency exchange rate on the dynamics of the gross
domestic product of the Republic of Tajikistan as a
whole ensure an increase in the efficiency of
monetary and foreign exchange policy, production,
trade, government revenues and ensuring economic
development. The result of the model shows that the
economic growth of the Republic of Tajikistan
reaches 7% on average, of which about 0.17% is due
to the increase of the real effective exchange rate.
6 POLICY IMPLICATIONS
In order to ensure the effectiveness of monetary and
exchange rate policies, it is recommended that:
- Introduction into practice of the model of gross
domestic product, depending on the real effective
ISC SAI 2022 - V International Scientific Congress SOCIETY OF AMBIENT INTELLIGENCE
246
exchange rate and investment for the choice of
monetary policy.
- implementation of the proposed model of the
influence of the exchange rate on the dynamics of the
gross domestic product in order to choose a monetary
policy, which makes it possible to substantiate the
influence of monetary policy on the exchange rate,
the external sector and the growth of gross domestic
product.
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