Major Agricultural Export Adjustment for Currency Depreciation in the Presence of Exchange Rate Premium (1974-2003)
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Date
2005-06
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A.A.U
Abstract
The country, Ethiopia, has passed through centrally command economy where
resources are mainly produced and allocated (at least conceptually) by the
government. Particularly the fixed exchange control system pursued by the former
government had a lot of pressure on the economy. Among these the increasingly
important share of the black market is one. However, by year 1992 the Transitional
Government of Ethiopia (TGE) had took Economic Reform Program. The domestic
currency has devalued and further measures are taken that result to depreciation
of the birr and reduction of the exchange rate premium. An econometric model,
Error Correction Model, is employed to empirically investigate the adjustment of
major agricultural exports of the country to currency depreciation in the presence of
parallel market. Time-series data (from year 1974-2003) of GOP, parallel exchange
rate, official exchange rate, volume and value of major agricultural exports, and
CPI are used. The empirical result suggests that exchange rate depreciation that
erodes the parallel market premium has significant impact in export performance.
The insignificant coefficient of official exchange rate and the significant (negative)
coefficient of the premium together tells us that the improvement in export
performance was due to the switch of trade from illicit to official channel implying
the black market has important share in the country's export. The econometric
result also suggests that there is inefficiency in resource utilization. Generally, the
pervasiveness of structural rigidities in developing countries, as explained by
structuralisms that need to be tackled to improve the export performance is
emphasized. Therefore, the implication is that complementary measures need to
be taken along with the devaluation of the currency in order this measure have
significant and positive impact on the country's agricultural export.
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Keywords
Agricultural Export, Currency Depreciation