Evaluation of the Effect of Exchange Rate Variability on the Export of Ethiopia’s Agricultural Product: A Case of Coffee

Abstract

Research was conducted to find out the effects of exchange rate variability, terms of trade, competitiveness and gross domestic product on the dominant export crop of Ethiopia, coffee. This study employs annual time series data (1992–2010) and uses the autoregressive distributive lag (ARDL) model augmented by the Wald test. The results reveal that exchange rate variability has a negative effect on the export of coffee in the short run, but is insignificant in the long run. This implies that, over time, exchange rate changes in the country have been favouring the export performance of coffee. Regardless of exchange rate variability, the competitiveness of the country, explained by real effective exchange rates, improved, but the price of coffee did not increase relative to the price of imports, which has resulted in deteriorating terms of trade. To improve the worsening terms of trade and benefit from policy changes, export diversification and value addition are possible solutions the country should focus on. JEL Classification: F130