The Exchange Rate : Why It Matters for Structural Transformation and Growth in Ethiopia
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 trans...
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| Language: | English |
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World Bank, Washington, DC
2019
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| Online Access: | http://documents.worldbank.org/curated/en/898821559134798352/The-Exchange-Rate-Why-It-Matters-for-Structural-Transformation-and-Growth-in-Ethiopia http://hdl.handle.net/10986/31750 |
| Summary: | 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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