THE IMPACT OF CURRENCY DEVALUATION ON ECONOMIC GROWTH: ITS BENEFITS AND COSTS ON ETHIOPIAN ECONOMY

Abstract

In recent times, Ethiopia has experienced far-reaching economic growth and development changes. Despite this growth, the country has been chronically running a trade deficit. 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 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 regression using 27 years’ time series data through SPSS software . Because of the quantifiable behavior of the variables, this research paper has used quantitative approach to fulfill the major objectives of the research. In addition to this; the overall frame word of the research 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 paper suggests a quick structural economic policy reformation in order to tackle the existed 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.