“This paper summarizes the macroeconomic consequences of an over-valued currency. It describes the extent of foreign exchange misalignment in Ethiopia and its impact on the foreign exchange rate and the premium obtained through commodity smuggling in the country. Between 1974 and 1991 there were various forms of exchange and trade controls, which resulted in the increase in premiums, smuggling and other macroeconomic imbalances. In 1991 and economic reform programme was introduced that included a 59% devaluation. The effect of the devaluation on various macroeconomic indicators suggests that the exchange rate reform policy was able to produce the desired results. The major conclusion of this study is that devaluation and the corresponding increase in the real exchange rate increase the supply and export of Ethiopia’s principal commodity (coffee) through the official market.”
