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The Impact of the Real Exchange Rate Changes on Export Performance in Tanzania and Ethiopia
Wondemu, Kifle Asfaw Potts, David J.
Wondemu, Kifle Asfaw
Potts, David J.
Publication Date
2016-08
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(c) 2016 African Development Bank. Full-text reproduced with publisher permission.
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Accepted for publication
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Abstract
The importance of trade as an engine of
growth is well established. Empirical
literature shows that the growth impact
of exports is much stronger when the
export basket is vertically and
horizontally diversified. This paper aims
to assess the role of the real exchange
rate in enhancing export supply and
promoting export diversification in
Ethiopia and Tanzania. The empirical
results suggest that, while overvaluation
is harmful to exports, undervaluation of
the real exchange rate boosts export
supply as well as export diversification.
A high rate of growth in exports is
associated with periods of undervalued currencies. A major share of the
difference in export performance
between the two countries can be
explained by differences in real
exchange rate policy. Tanzania has
maintained an undervalued real
exchange rate for a long time and as a
result, performs better in terms of
export supply and diversification.
However, export expansion achieved
through undervaluation raises the rate
of inflation for Tanzania. Tanzania
managed to maintain an undervalued
real exchange rate through the
accumulation of reserves and a high
rate of inflation.
Version
Published version
Citation
Wondemu K and Potts D (2016) The Impact of the Real Exchange Rate Changes on
Export Performance in Tanzania and Ethiopia. African Development Bank Group Working Paper
Series. No 240.
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Working Paper