Causes and Impacts of Foreign Currency Reserve Crises in Ethiopia

Abstract

The main objective of this study is to explore the current phenomena of a foreign currency reserve crisis in Ethiopia, its causes and its negative impacts upon the Ethiopian national economy. This study employed a descriptive research method due to the nature of the phenomena. Secondary data sources, such as reports of international and national financial organizations, business review reports, published articles, and online Internet sources were used, and the secondary source data were analyzed thematically. Accordingly, this study shows that foreign currency reserve crises are a considerable challenge for the sustainable development of Ethiopia. Recently, the Ethiopian economy has been significantly affected by the impact of a foreign currency crisis, with the Ethiopian Birr performing weakly against major foreign currencies within the global competitive market. Moreover, this study revealed that the widespread and severe level of corruption and the country’s weak export earnings capacity are considered as the major contributing factors for the country’s foreign currency crises. Resource embezzlement and fraud has led the country to a severe foreign currency reserve crisis, an upscale of the black market economy, and a considerable weakening of Ethiopia’s capacity to export goods in today’s international competitive market against currencies such as the US Dollar. This leads the country to an increasingly vulnerable national economy through increasing heavy debt distress. This study suggests that the Government of Ethiopia should further strengthen the capacity of anti-corruption agencies in their fight against a critical level of corruption and to develop better strategies to enhance the country’s export earnings capacity.