Impact of Exchange Rate Reform on Trade in Ethiopia

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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



Exchange Rate Reform