Economy Wide Impact of Currency Devaluation in Ethiopia: A Recursive Dynamic Computable General Equilibrium Analysis

International Journal of Economics and Management Studies

© 2019 by SSRG - IJEMS Journal

Volume 6 Issue 6

Year of Publication : 2019

Authors : Takele Abdisa ,Derese Getachew

10.14445/23939125/IJEMS-V6I6P113

How to Cite?

Takele Abdisa ,Derese Getachew, "Economy Wide Impact of Currency Devaluation in Ethiopia: A Recursive Dynamic Computable General Equilibrium Analysis," SSRG International Journal of Economics and Management Studies, vol. 6,  no. 6, pp. ):84-90, 2019. Crossref, https://doi.org/10.14445/23939125/IJEMS-V6I6P113

Abstract:

This study analyzes the economy wide impact of currency devaluation on Ethiopian economy using Dynamic Computable General Equilibrium (DCGE) model. It utilized the updated 2009/10 Ethiopian Social Accounting Matrix (SAM) from 2005/06 developed by Ethiopian Development Research Institute (EDRI). In order to investigate the impact of currency devaluation on Ethiopian economy different simulations were made turn by turn. First, an increase in exchange rate by 15% was introduced to see the impacts of currency devaluation on Ethiopian economy. Consequently, all macroeconomic variables show reduction from base case scenario except the consumer price index which shows increment, explaining the inflationary pressure of currency devaluation. On the second simulation decrease in export price by 15% introduced to see the impact of currency devaluation on economy. As a result decrease in export price failed to recovery the export from low performance because the structural problem from supply side is not sufficient to meet the increased demand for exports after devaluation. Similarly, increase in import price by 15% under the third scenario also deteriorated the overall economic performance since Ethiopian imports are strategic imports which are not amenable for reduction following the advised devaluation because, most input purchased from foreigners at expensive price which increases cost of domestic production. Lastly, there is welfare reduction resulted from poor economic performance and increase in price which result in deterioration of welfare of the society. Based on finding the best way to improve export performance would be to replace currency devaluation by the structural reform which is still the bottleneck for export performance.

Keywords:

Currency, Devaluation, Export, Import, Performance

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