Determinants of Foreign Exchange Reserve in Ethiopia: A Time Series Analysis
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Date
2023-06-02
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A,A.U.
Abstract
Using time series data, this paper sought to investigate the factors that affect Ethiopia's foreign exchange reserves. Secondary data on variables such real effective exchange rate, current account balance, debt service, loans to the private sector, Real GDP, and growth rates of price regressed on foreign currency reserves were used in the study, which covering the time frame of 1987 to 2022. The data collected from the National Bank of Ethiopia were used in this study using an ARDL model. Based on the findings, the REER, inflation, and real GDP all play a substantial and favorable role in determining Ethiopia's foreign currency reserves. In contrast, Ethiopia's foreign exchange reserves are significantly and adversely impacted by the debt service. Therefore, this analysis suggests that the government of Ethiopia should keep its external borrowing to a minimum in order to lower debt servicing costs, boost domestic economic growth, encourage the appreciation of the birr, and improve current account balance through exports in order to increase foreign exchange reserves