EFFECT OF REAL EFFECTIVE EXCHANGE RATE VOLATILITY ON EXPORT PERFORMANCE IN ETHIOPIA: AN ARDL APPROACH

ABSTRACT Enhancing economic growth and in turn development requires reducing outflow of resources as a result of excess import over export. To improve export performance identifying its determinant factors has paramount importance. Hence the main aim of this study was examining effects of real effective exchange rate volatility on export performance in Ethiopia by applying annual time series data from the period 1980 to 2020 accounting 41 years samples. To do so an auto regressive distributed lag (ARDL) estimation techniques was employed. In the short run all independent variables except financial development have negative significant effect on export performance. While financial development has positive significant effect. The coefficient of error correction model is negative and it is statistically significant indicating short run deviation from long run equilibrium is not persistent and it adjusts towards equilibrium at a speed of 67.6% per year. In the long run real effective exchange rate has negative significant effect and the bound test confirms the presence of long run co-integration between variables. On the other hand, credit to private sector, trade liberalization, and GDP growth have positive significant effect on export performance in the long run, but external debt has insignificant effect. Based on the results the researcher recommends that to improve export performance government and national bank of Ethiopia can adjust both saving and lending interest rate policies. in addition, providing sufficient loan to export industries that diversifies and facilitates the shift towards the export of semi-finished and manufactured goods would be indispensable. Finally keeping the track of international exchange rate adjustment is crucial and the government of Ethiopia need to improve export performance through allocating the borrowed money in to high return investment and investing on industries that can substitute the imported goods.