Effect of Currency Devaluation on Ethiopia’s Major Export Commodities: The Case of Coffee, Oil Seeds and Hides and Skins

Abstract

This study analyzes the effect of real effective exchange rate on the Ethiopian major export commodities using annual time series data for the period 1980/81-2015/16. To determine the relation between dependent and the independent variables, both analytical (qualitative) explanations and econometric analysis are used in the study. With the help of cointegration and vector error correction analysis, the impact of real effective exchange rate on major export commodities was assessed in the long-run as well as in the short-run. The study found that the impact of real effective exchange rate on  major export commodities works through the aggregate demand channel in the short-run and the aggregate supply channel in the long-run i.e. decrease/devaluation in the value of the domestic currency promotes exports  only in the short-run. In the long-run, it discourages export. The study also found that the government, through infrastructure development, may play a key role in in increasing exports.  Expansion of road is found to be highly significant than real effective exchange rate in explaining improvement of exports in Ethiopia. Other variables like foreign direct investment with the expected positive sign and real gross domestic product with unexpected negative sign are also found to be statistically significant in explaining export in the long-run. The study shows that the country to be on the right truck to increase export earnings in the long run it is better not to devaluate further the currency and improve the road infrastructure which is the most important tools to increases export performance.

Keywords: Real effective Exchange rate, Devaluation, Export, VECM or co integrated VAR