Causes for Foreign Currency Liquidity Gap: a Situation Analysis of the Ethiopian Economy

Abstract

The percentage growth of the current account deficit has been diverging through time, mainly explained by the relatively higher growth of the value of imports than the rate at which the value of exports did. Some of the reasons for the current liquidity constraint in Ethiopian case include huge demand for strategic goods (such as petroleum), extended public investment, imported inflation, erratic foreign aid inflow, accumulated and uprising demand of non-strategic imports and poor foreign currency earning capacity. The government of Ethiopia has been committed to enhance the inflow of foreign currency by devising a series of various policy measures including export promotion and diversification, export support schemes, tax holiday, preferential rights for foreign currency and bank credit, loose land lease policy, building industrial zones, awards for model exporters, organizing and coordinating some international markets for domestic goods like a patent right for coffee, flowers and the like which is appreciable and need to be further enhanced.

Keywords: Foreign Currency, Ethiopia, Economy, Liquidity