英语论文网

institutions of IMF and WB to LDCs at that time, Ethiopia has also adopted it directly or indirectly. SAP, in its fundamental nature, had two components. One side was stabilization which follows the economic equilibrium theory aiming at balancing supply and demand side of an economy through prudent monetary and fiscal policy. The result expected from these actions was to reduce international indebtedness of the poor countries. The other side was structural reform whose main action included relative prices majorly through altering or exchange rate adjustment, if necessary. Hence in 1992, the current government of Ethiopia took devaluation of the currency as one policy actions in hope for the economy to recover and boost up export production, win competitiveness and attain the aimed growth.

One reason given for the case of devaluation in Ethiopia was

Looking at the balance of payment and the appropriateness or the misalignment of that time exchange rate, that time transitional government, the current EPRDF government forwarded some reasons for the devaluation measure.

Pros

A. The interventionist foreign trade policy and the exchange rate regime (fixed)

During the military government there had been a strong trade restricting rules. There had been high tariffs, duties and export taxes in the name of government budget earning. These measures further widen the gap between the real effective and nominal or official rate. For instance with the fixed official rate of 2.07 birr/$ at that time let the tariff for export say was 30%. Here the real effective rate exporters face will be 1.449 birr/$, being appreciated that worsen their competitiveness internationally. (2.07 birr/$ - 2.07birr/$*30%) From the importers side let’s say the import tariff was 40%. Then the real effective rate importers face will be 2.898 birr/$, being depreciated that makes intermediate goods dearer which distort productivity. (2.07 birr/$ + 2.07birr/$*40%)

B. Government domestic financing measures

Due to the domestic and neighboring persistent war engagement the military government used to print money for domestic financing. This type of budget financing indeed triggers inflation. According to Priewe J., and Herr, H., 2005, p.279 one factor determining the quality of a currency is the inflation level of a country.

The position of the BOP; Unsustainable and persistence trade balance deficit.

Unsustainable is characterized by large foreign debt and high debt financing

Persistence is characterized by longer period of imbalance

When we look at the BOP of Ethiopia on table 1, from 1984/85 up to 1991/92 (pre devaluation period of October, 1992), we observe unsustainable and persistence trade and current account imbalance tilting to deficit.

Financing this persistence and unsustainable trade that contributed for current account deficit requested high amount of public transfers in particular ODA plus borrowing abroad. This situation made Ethiopia to be counted among the HIPICs with high rate of debt to GDP ratio being as high as 33 % in 1989/90. This is extreme ratio compared to the EU membership criteria of less than 3% public deficit.

Econometrics Application

Formulation of Model and Expected Signs

The rese