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.