Impact of Foreign Exchange Reserve on Economic Growth of Ethiopia Foreign Exchange Reserve on Economic Growth

Abstract

The study tries to examine the impacts of foreign exchange reserve on the economic growth of

Ethiopia from 1981 to 2020 (40 Years) by using Ordinary least square (OLS) technique.

Ordinary Least squares regression is used to predict the behavior of dependent variables: - Real

GDP and with relationship between Independent variables: Foreign Exchange Reserve, Foreign

Exchange rate, Money Supply, Capital Formation, Export and Import. The data were collected

from National Bank of Ethiopia (NBE) and Ministry of finance and economic development

(MoFED) to analyze the foreign exchange reserve on the economic growth of Ethiopia. To test

for the properties of time series, Augmented Dickey-Fuller and Phillip-Perron test used to

determine the stationarity of the variables and the study used Johansen Co-integration test

employed to determine the order of integration while Vector Error Correction model (VECM)

was employed to determine the speed of adjustment to equilibrium. The findings suggest that

Foreign Exchange Reserve, Gross Capital Formation, Real Exchange Rate and import has

positive and significant long run relationship between economic growths in Ethiopia. Broad

Money supply and Export also showed a negative relationship in long run impact, but the impact

is statistically significant on economic growth. The result further shows a long run relationship

between Foreign Exchange Reserves and economic growth in Ethiopia for the period under

review. Therefore, emphasis should be place on accumulating Foreign Exchange Reserves in

Ethiopia, as this will accelerate growth and development in Ethiopia economy.