Birr Devaluation And Its Effect On Economic Growth In Ethiopia

Abstract

This study investigated the effect of currency devaluation on economic growth in Ethiopia. In order to generate the necessary data for this study, National Bank of Ethiopia (NBE), world development indicators (WDI), World Bank (WB) annual report were used for the period of 1989/90 from 2018/19. The autoregressive distributed lags (ARDL) model is used for interpretation. Results from ARDL Error Correction Model revealed export and broad money supply have significant and a positive long run effect on economic growth, while foreign direct investment have a negative long run effect on the economic growth of Ethiopia. However, real effect exchange rate and inflation are insignificant effect on economic growth in the long run. The ARDL error correction mechanism result indicates that short term changes in economic growth may actually be sufficiently explained by currency devaluation and other factors selected in the model. So, the hypothesis of birr devaluation has no significant effect on economic growth in the long run cannot be rejected. The study shows that in the short run currency devaluation leads to increase in output and may be improves the balance of payments but in the long run the consequence of the devaluation shows that the insignificant effects. From the ARDL regression results, it was noted that undervaluation of the currency is contractionary in the long run and expansionary in the short- run. Since currency is sensitive key element that can link microeconomic and macroeconomic aspect of the economy, a little beat modification on currency results in overall disturbance of the economy. So, in Ethiopia highly deep investigation likes Marshal Lerner Condition for devaluation and looking other countries economic condition is important before currency devaluation