The Impact of Government Expenditure Policies on the Exchange Rate

This paper aimed to analyze government expenditure policies and measure their impact on the exchange rate, as well as the extent to which the exchange rate affected economic stability in Sudan. The importance of the paper lies in analyzing the relationship between government expenditure policies and the exchange rate in Sudan over a specific period of time, considering government expenditure as the independent variable and the exchange rate as the dependent variable. The descriptive, analytical, and econometric approaches were adopted, using secondary data from reports of the Central Bank of Sudan, the Ministry of Finance and Economic Planning, and the Central Bureau of Statistics. Accordingly, the paper formulated a hypothesis stating the existence of a relationship between government expenditure policies and the exchange rate. The ordinary least squares (OLS) method was applied to estimate the relationships between variables, while the Phillips-Brown test was used to examine the stationarity of time series, and the Johansen cointegration test is used to detect long-run relationships. The paper relied on time series data using secondary data from reports of the Central Bank of Sudan, the Ministry of Finance and Economic Planning, and the Central Bureau of Statistics, in addition to some secondary sources such as specialized bulletins and periodicals for the period 2000-2022. The paper confirmed that government expenditure policies have a direct and positive impact on the exchange rate (coefficient of 0.00238), indicating the role of government expenditure policies in promoting economic activity and their impact on the exchange rate. If government expenditure policies are not directed towards productive sectors that contribute to increasing GDP, they will contribute to an increase in the exchange rate, given the inverse relationship between the exchange rate and GDP. This means that GDP plays a major role in depressing the exchange rate of the national currency against foreign currencies, indicating the role of fiscal policy in promoting economic activity. The coefficient of determination (R²) recorded a value of 0.95, meaning that 95% of the changes in the exchange rate are attributable to the independent variables, while the F statistic of 431.178 (p < 0.01) confirmed the significance of the model. Time series tests indicated exchange rate instability, reflecting economic fluctuations and instability caused by events such as the secession of South Sudan. The paper also revealed challenges such as chronic fiscal deficits, accumulated public debt, and weak capital spending. Based on the findings, the paper recommended increasing government expenditure on infrastructure and productive activity, which would contribute to expanding the economy’s productive capacity and increasing GDP. When formulating expenditure policies and governance, the impact of government expenditure on the exchange rate must be taken into account, as it drains a significant portion of income on import spending at the expense of GDP, potentially having negative effects on the exchange rate. Finally, the paper recommended conducting additional research that incorporates other variables, such as money supply, foreign investment, and inflation, to provide a more comprehensive view of the factors affecting the exchange rate in Sudan.