Assessing The Effects of Floating Exchange Rate Regimes on Investment in Ethiopia
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Date
2025-09
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Addis Ababa University
Abstract
This research examines the effects of Ethiopia's transition to a floating exchange rate system in July 2024 on investment trends. A mixed-methods design integrates macroeconomic statistics from
the NBE, IMF, and World Bank with sectoral data from the Ethiopian Investment Commission, supplemented by qualitative stakeholder perspectives. Foreign direct investment increased by
13.2% year-on-year, with EIC data indicating significant inflows into agro-processing and textiles, rising by 21.5% and 18.7%, respectively. Conversely, domestic investment contracted, as
gross fixed capital formation decreased from 7.6% to 2.8%, influenced by increasing input expenses and exchange rate instability. Imported inflation reached a maximum of 31.8%,
disproportionately impacting SMEs and import-reliant industries. The study suggests that in the absence of hedging mechanisms or focused policy interventions, Ethiopia's liberalized system may
not achieve consistent, widespread investment benefits
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Keywords
Ethiopia, floating exchange rate, foreign direct investment, domestic investment, exchange rate volatility, competitive effects, uncertainty effect