The Impacts of Devaluation on Export Performance: The Case of Ethiopia

Agriculture plays a vital role in the Ethiopian economy, contributing 42 percent of Gross Domestic Product (GDP), 80 percent of the employment and 90 percent of total export earnings (Ministry of Finance and Economic Development [MoFED] 2011; Diao et al. 2010). In 2009 with an effort to remove the vicious socio-economic circle, the government of Federal Democratic Republic of Ethiopia (FDRE) developed a Growth and Transformation Plan (GTP) with a priority to export orientated agricultural development led industrialization (MoFED 2010 P. 22). Despite the over-ambitious plan, however, the performance of the export sector has remained undeveloped which calls for sound macroeconomic policies that are crucial to combat the bottlenecks constraining the sector. This essay examines the consequences of devaluation on the performance of Ethiopia's export sector. Foreign exchange rate is a key macroeconomic variable that determines performance of export in a country. The reasons why export performance depends on the foreign exchange regime in developing countries include: the characteristics of exportable goods, the effectiveness of financial sectors and trading with foreign currencies rather than with the domestic currency (Nilsson and Nilsson 2000). Accordingly, Ethiopia's export is characterized by primary agricultural products with inelastic export demand and supply, concentration of market and products, and little value addition. The result of primary agricultural product export is a smaller marketing margin and insignificant bargaining power on the world market. The financial sector is also constrained with higher probabilities of the existence of parallel markets that fail at allocating resources to their most efficient usage. More... ...tional Economics: Theory and Policy. 9th ed. Edinburgh Gate: Pearson Education. Melesse, Wondemhunegn Ezezew. 2011. â€Å"The Dynamics between Real Exchange Rate Movements and Trends in Trade Performance: The Case of Ethiopia.† Munich Personal Research Papers in Economics Archive (MPRA). MPRA Paper No. 29161. Munich. Michael, Nwidobie Barine. 2011. â€Å"An Impact Analysis of Foreign Exchange Rate Volatility on Nigeria’s Export Performance.† European Journal of Economics, Finance and Administrative Sciences V (37): 47-55. National Bank of Ethiopia (NBE). 2011. National Bank Annual Report 2009/10. Addis Abeba: NBE. Nilsson, Kristian and Lars Nilsson. 2000. â€Å"Exchange Rate Regimes and Export Performance in Developing Countries.† Oxford: Blackwell Publishers: 331-349. World Bank (WB). 2012. â€Å"World Development Indicators Database: Ethiopia.† Washington, DC: WB.