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ediate and almost complete pass through of exchange changes to the agricul-tural import unit value and the slower and incomplete pass through to the agricultural export unit value.”

In the mid 90s of Reinhart, Carmen (1995) made an investigation looking for some evidence on currency devaluation [8] as an export promotion and trade imbalances correction policy tool from developing countries angle.

On The relationship between exchange rate and trade balance has attracted many scholars Philip R. L. and Gian Maria M-F., 2002, also highlighted that the relative price of none traded goods was the important channel that links trade balance and the real exchange rate in their investigation. This has an implication for a country to run a trade surplus, a weak or devalued real exchange rate was at the center. According to these researchers among many factors the three reasons are as follows. First due to devaluation the purchasing power of the domestic currency lowers that “…the negative wealth effect of maintaining absorption below production lowers demand for nontradables” Philip R. L. and Gian Maria M-F., 2002, p. 6. Second labor supply increases as workers would be forced to provide their labor even at cheaper wages in order to lower their declining demand. Third as there is a declining demand for nontradables their relative prices to tradables also decline, which can be an incentive for shifting factors of production from domestic good and service production (nontradables) to export production (tradables). Depending on the above three argument Philip R. L. and Gian Maria M-F., 2002 stood firm on the inverse relation between trade balance and relative price of nontradables.

Foreign Trade and Export Promotion Efforts in Ethiopia

Before going in to the econometrics analysis on the impact of exchange rate in the case of Ethiopia, it is worthwhile to empirically see in to the foreign trade and promotion efforts of the country. Hence, this discussion has been presented in the following sub sections.

Structure and Performance of Imports, Exports and trade balance

As in many Sub Saharan countries the commodity structure of the Ethiopian export sub sector is dominated by agricultural output. From figure 1 below on six years average starting from the year 1990/91 until 2007/08, with a declining share coffee export covers the largest share of the total export. For the last six years on average coffee export has declined to 34% from the first six years average of 55%. Oil seeds, Chat and gold exports have shown an increasing pattern on export share. Such primary commodity dominance in the export sector has exposed Ethiopia’s export to be affected easily by highly fluctuating world market prices. Moreover, Ethiopia’s share in the world coffee market has been under 2 percent for the last twenty years besides its declining trend (Gemechu, D., 2004)

Petroleum products account more than 15% of the country’s import in average for the last six years. Further the import structure is composed starting from consumer goods such as textiles, medical and pharmaticular products, food irrespective of agriculture being the back bone of the economy to capital goods and equipments.

It is also observed that the growth rate of imports out weight the growth rate of exports. This is situation