Impact of Exchange Rate Reform on Trade in Ethiopia
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Date
2012-05
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A.A.U
Abstract
Exchange rate reform combined with other liberalizing trade policy
reforms in Ethiopia's economic reform program was anticipated to
diversify the export base of the economy which is highly dominated by
coffee export, still with limited supply. Parallel to diversification of
export base of the economy, reducing the imports especially the
consumer goods was objective of the reform. The study investigates
the effect of exchange rate reform in Ethiopians trade performance
during the period 1970/71 to 2009/10. The overall performance
generally viewed under fixed exchange rate policy (1970 /7 1-
1991 / 1992) and flexible exchange rate (1991 / 1992-2009/2010).
Literatures justified that the fixed exchange rate policy critically
affects the country's trade balance. As a result of fixed exchange rate
policy the country's domestic currency has been assumed as
overvalued. The effect of this over valuation lower the export volume
and makes import very cheap hence the trade balance deficit would be
widened. Such problem and other related conditions demanded the
exchange rate to be flexible . Findings of this study justified positive
and significant change in diversification of export base after the
exchange rate reform has been observed. The export mix which was
dominated (actually it is still dominating) by coffee, fairly increased by
non-coffee exports through the depreciation of the values of the
country's currency.
On the other hand it has been observed that the structure of imports
which is pro-consumer goods remained unchanged even after
adoption of persistent devaluation of the exchange rate. Exchange rate
reforms were found not to constrain imports as anticipated rather
they stimulate imports because diversification and facilitation of
export items mostly requires imputes partly imported as raw
materials/capital goods. A major policy lesson is that exchange rate
reforms (devaluation) are not sufficient to diversify the economy and
change the structure of imports. Other major incentives that create
conducive environment for domestic production like effective
infrastructure and accessibility and supply of credit that could lead to
significant improvement in competitiveness are required
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Keywords
Exchange Rate Reform