Does Real Exchange Rate Matter for Ethiopia"s Exports? A Gravity Model Analysis

Real exchange rate is usually used as a measure of export competitiveness of a country. Despite mixed results in empirical works, its depreciation (appreciation) is supposed to stimulate (depress) exports from a particular country. This study mainly focuses on examining whether Ethiopia's exports are determined by movements in real exchange rate. To examine this issue, the aggregate export and the exports of two main subsectors; namely, Coffee and Oilseeds are taken into consideration using bilateral exports to seventeen major trading partners over the period 2000-2009. Accordingly, a dynamic panel data gravity model that takes into account the persistent nature of trade is estimated using the system GMM estimator. Following recent approach in empirical studies, both the current and one year lagged real exchanges rates are included, where the latter is intended to account for the sluggish adjustment of trade to changes in relative prices. The results of the study show that both lagged and current real exchange rates are not in a position to exert significant effect on the bilateral exports of the country, in all the three export categories under consideration. The implication is that complementary measures are required to gain competitiveness in international market. Diversifying exports from traditional primary commodities to nontraditional price elastic export items, expanding exports destinations and giving due attention to the quality of exports are reasonable options