Macroeconomic stability and foreign exchange

Macroeconomic stability affects private businesses generally and MSMEs more specifically. The ability of MSMEs to perform well in overseas markets and their ability to import technology or critical inputs are affected by macroeconomic stability and the availability and cost of foreign exchange, both of which are the domain of a state’s macroeconomic policy. 

The stability of macroeconomic variables promotes the profitability of MSMEs and propels them to a stage where they can access financing for sustaining growth.  Macroeconomic factors affecting the profitability of an MSME include the size of population and number of firms in a country, exports and imports, FDI, GDP, unemployment levels, inflation levels, taxes paid, and average salary, among others.99 Research has found that interest rate changes and unemployment have the most significant impact on profitability.100

MSMEs with international activities are significantly exposed to foreign exchange (FX) risk – typically around 19 per cent of revenue – of which only a part is hedged and even less is managed actively.101 The exchange rate is a critical macroeconomic factor that affects international trade and the real economy of each country. The development of international trade creates conditions where volatility comes with the exchange rate. Empirical findings data reveal that the exchange rate volatility has a significant negative effect on real economic growth.102 Exchange rates are the primary indicator that influences the price of products and services that affect the transaction level on international trade and capital movement between countries. Countries operate under different exchange rate regimes, from hard pegs to floating. Floating rates are more market dependent but lead to sharper fluctuations that affect international trade and the real economy of each country. 

Therefore, exchange rate stability is the primary source of economic growth, and monetary authorities must adopt an exchange rate policy that leads to stable exchange rates. The policy implication is to minimize exchange rate volatility where it has a relevant role in economic growth. Also, policymakers should keep inflation and interest rates under control since they help mitigate the negativity of volatility on growth, which is connected to international trade and investments103

Determining the appropriate policy response to exchange rates and capital flows generally relies on the careful monitoring of FX liquidity, including the speed of exchange rate change and the effects of capital flows on asset prices, to ensure orderly market functioning. Many countries in the Asia-Pacific region allow exchange rates to be flexible and market-determined during regular times but stand ready to intervene in FX markets in response to excessive FX volatility to maintain external stability. In addition, some are prepared to utilize capital flow management measures when intervention is insufficient.

Some central banks in the region come close to the Tinbergen principle104 of one instrument for one objective. At the same time, in practice, some tools can affect multiple purposes. Moreover, employing a combination of devices in a complementary manner can strengthen policies' effectiveness and help mitigate some unwanted side effects of policies. There is a need for a consistent monetary policy framework that should bring about realistic exchange rates, emphasising its role to promote MSMEs' output and productivity directly. Policymakers should consider exchange rate policies as a long-term fix to the problem of growth in foreign goods demand.


99 Bekeris, Rokas. (2012). The impact of macroeconomic indicators upon SME’s profitability. Ekonomika. 91. 117-128.

100 Ibid.

101 Accountants for business (year?), SMEs and foreign exchange risk: are small and medium-sized accountancy practices up to speed?

102 Alagidede, Paul, and Muazu Ibrahim. 2017. On the causes and effects of exchange rate volatility on economic growth: Evidence from Ghana. Journal of African Business 18: 169–93. [CrossRef].

103 Bahmani-Oskooee, Mohsen, and Abera Gelan (2018). Exchange-rate volatility and international trade performance: Evidence from 12 African countries. Economic Analysis and Policy, 1–22.

104 This refers to a rule of thumb which states that policymakers trying to achieve multiple economic targets need to have control over at least one policy tool for each policy target. This is because the achievement of certain economic targets precludes the achievement of others.