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The Exchange Rate : Why It Matters for Structural Transformation and Growth in Ethiopia (English)

Ethiopia has achieved sustained high growth for more than a decade. At the same time, the country has been facing several economic challenges, including falling exports, chronic foreign currency shortages, as well as a slow pace of structural transformation. In recent years, the already overvalued birr has appreciated sharply in real terms, partly driven by the appreciation of the dollar, thereby making Ethiopia’s competitiveness and industrialization drive more difficult. In response to these challenges, this paper looks at the question of why the real exchange rate is a useful policy instrument. The analysis suggests that Ethiopia needs a more flexible exchange rate policy. A competitive or undervalued exchange rate is important in bringing about productivity-enhancing structural change. There is robust evidence that a real devaluation stimulates exports in general and manufacturing exports in particular, improves the trade and current account balances, and spurs economic growth. Currency undervaluation is a second-best policy intervention that can help offset some of the key constraints to manufacturing growth prevalent in low-income countries and speed up structural transformation. However, exchange rate adjustments need to take into account the increase in the cost of capital imports and debt burden.


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    The Exchange Rate : Why It Matters for Structural Transformation and Growth in Ethiopia

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    real exchange rate; trade and investment; de facto exchange rate regime; level of foreign exchange reserve; real effective exchange rate; Exchange Rates; real exchange rate depreciation; external current account deficit; trade balance; nominal exchange rate depreciation; adjustment need; external current account balance; flexible exchange rate policy; balance of payment crisis; sectoral composition of output; determinants of economic growth; real exchange rate appreciation; Commercial Bank of Ethiopia; foreign currency; official exchange rate; Balance of Trade; exchange rate devaluation; real gdp; foreign exchange market; manufacturing sector; parallel market; rapid export growth; current account imbalance; public investment program; exchange rate adjustment; parallel market rate; local currency value; business environment constraints; export of goods; high inflation rate; international commodity price; external debt stock; tight monetary policy; foreign currency exchange; access to finance; annual export growth; implications for policy; instrument of development; parallel exchange rate; expansionary monetary policy; terms of trade; agriculture and service; external public debt; consumer price index; trade in goods; increase in inflation; foreign exchange regime; price of capital; capital goods import; balance sheet effect; gross public debt; cost of debt; foreign exchange control; exchange rate overvaluation; annual debt service; public debt stock; public infrastructure investment; private sector activity; foreign currency reserve; Exchange rate policies; overvalued exchange rate; competitive exchange rate; fast economic growth; real output growth; quantity of exports; cost of import; cost of capital; real appreciation; export performance; real devaluation; currency undervaluation; empirical analysis; real depreciation; asian countries; nominal depreciation; currency overvaluation; nominal devaluation; light manufacturing; external balance; primary commodity; manufacturing export; capital input; external competitiveness; international competitiveness; manufacturing activities; import demand; interbank market; trading partner; quantity rationing; effective price; Business Climate; consumer good; industrialization drive; creative destruction; industrialization strategy; market distortion; trade deficit; domestic inflation; industrial sector; Learning and Innovation Credit; export sector; export market; consumer goods; domestic good; statistical significance; positive impact; investor uncertainty; empirical result; linear trend; debt burden; manufacturing good; import price; import good; inflationary gap; economic efficiency; risk premium; anecdotal evidence; net impact; illicit activity; negative effect; open access; productive use; aggregate demand; future investment; foreign good; domestic consumer; tradable sector; supply shock; foreign consumers; productive activity; trade contract; manufacturing industry; Natural Resources; federal reserve; economic regime; empirical model; world income; domestic income; market clearing; market participant; real export; consumption pattern; price mechanism; official reserve; oil price; global food; monetary base; empirical estimate; equilibrium level; domestic price; exporting firms; econometric evidence; empirical evidence; investment incentive; regression analysis; significant evidence; downward spiral; international level; monetary system; comparator country; inflation volatility; relative income; empirical regularity; foreign demand; export product; process innovation; coffee price; local ones; foreign price; development policy; food price; price change; causal effect; empirical issue; currency depreciation; increasing exports; failure rate; monetary expansion; credit growth; institutional weakness; market environment; fiscal balance; domestic production; income growth; Industrial Policies; Industrial Policy; inflationary spiral; functioning market; debt sustainability; external shock



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The Exchange Rate : Why It Matters for Structural Transformation and Growth in Ethiopia (English). Washington, D.C. : World Bank Group.