Economic Implications of Foreign Exchange Rationing in Ethiopia

Abstract

Increases in foreign transfers and capital inflows helped spur Ethiopia’s
economic growth in recent years, but also contributed to a real exchange rate
appreciation that reduced incentives for production of tradable goods. Then,
beginning in March 2008, following major external shocks, foreign exchange for
imports was restricted to avoid excessive drawdown of reserves.  
This paper examines the implications of these shocks and policies using a
Computable General Equilibrium (CGE) model of the Ethiopian economy. The
results show that there are substantial costs to both foreign exchange rationing
and real exchange rate appreciation in terms of economic efficiency and income
distribution.