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Prepared by Abdourahmane Sarr.
The potential risks are the loss of external competitiveness as trade integration increases and the provision of an exchange rate guarantee to investors as financial integration intensifies.
See Laurens and Sarr (IMF Country Report 03/259, 8/21/03; and IMF Country Report 02/120, 6.17/02) for a description of the monetary policy framework and planned sequencing of capital account liberalization). These papers also discuss the structural policies that support a flexible exchange rate regime, namely deep foreign exchange and money markets, and a healthy and well supervised financial sector.
Short term debt includes current amortization and non-residents’ deposits and excludes suppliers’ credit. Deposits of residents in foreign currency and local currency convertible into foreign currency are negligible (less than 0.3 percent of M3), and there is no foreign currency public debt to residents. There is, therefore, no need for augmented reserve coverage indicators that would include these liabilities.
We replaced exports volatility by the current account deficit to GDP as a measure of current account vulnerability in our single country empirical context and annual exports data.
Weak exogeneity was rejected, implying that a test of cointegration using a single equation error correction model of foreign reserves would not be appropriate.