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 merchandise earnings (Ministry of Finance and Economic tuition 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 precession 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 decisive to combat the bottlenecks constraining the sector. This essay examines the consequences of devaluation on the performance of Ethiopias 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 monetary sectors and trading with foreign currencies rather than with the domestic currency (Nilsson and Nilsson 2000). Accordingly, Ethiopias export is characterized by primary agricultural products with inelastic export demand and supply, concentration of market and products, and miniature value addition. The result of primary agricultural product export is a smaller marketing margin and insignificant bargaining power on the humans 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. The kinetics between Real Exchange Rate Movements and Trends in Trade Performance The Case of Ethiopia. M unich Personal Research composings in Economics Archive (MPRA). MPRA Paper No. 29161. Munich. Michael, Nwidobie Barine. 2011. An Impact Analysis of Foreign Exchange Rate Volatility on Nigerias 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. Exchange Rate Regimes and Export Performance in Developing Countries. Oxford Blackwell Publishers 331-349. terra firma Bank (WB). 2012. World Development Indicators Database Ethiopia. Washington, DC WB.