The Impact of Currency Devaluation on the Ethiopian Economy

Abstract

Devaluation is one of the most important but controversial trade policies recommended by the IMF for most of the developing countries in restoring the trade balance and increasing real GDP growth. To this end, this study identifies and analyzes the impact of currency devaluation on Ethiopian economic growth with the intervening role of five major macroeconomic indicators namely export, import, inflation rate, FDI, and interest rate using mediation analysis with multiple linear regression using 27 years’ time series data through SPSS software . Because of the quantifiable behavior of the variables, this study has used quantitative approach to fulfill the major objectives of the research. In addition to this; the overall frame work of the study was designed with causal or explanatory method in order to test the cause and effect relationship between the variables. The result showed that devaluation brought high inflation rate which adversely affected both domestic and international market of the country. Moreover, it increased the rate of growth of imports and decreased the rate of growth of exports; this indicated that devaluation does not have a significant impact on Ethiopian economy. Based on the findings, this study suggests a quick structural economic policy reformation in order to tackle the existing problems of the country. Moreover, there is an obvious need to combine monetary policy measures with fiscal policy in order to promote sustained economic development.