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Exchange policies

Ethiopia has a unique position in Africa in many ways. Some sections of the population claim that Ethiopia is not Africa. It has four main geographic regions from west to east the Ethiopian Plateau and other three African plateaus. . Like all other African countries Ethiopia’s population is mainly rural, with most living in highlands. Various distinct ethnic groups live in Ethiopia. Ethiopia is considered very poor and agricultural country, with farm products accounting for over half of the country’s GDP, its main export is coffee.

Majority of people are engaged in farming. But due to various reason including frequent periods of drought, Ethiopia is not self sufficient in food products and have to rely on massive food imports. Industrial sector of Ethiopia mainly constitute agricultural processing and the manufacture of consumer goods. There are no large-scale mineral deposits in Ethiopia. The poor transportation network is not helpful to economic activities. The annual imports are usually higher than the value of its exports.

The principal imports are food, petroleum and petroleum products, machinery, motor vehicles, chemicals, and manufactured consumer goods; the main exports are coffee, skins, oilseeds, grain, and gold. Apart from these difficulties and resource restrain Ethiopia‘s development is badly affected by armed conflicts. These arms conflicts have badly damaged already weak Ethiopian economy and it has become difficult for it to survive without external support. It led to its contact to with donar agencies like IMF and World Bank.

HYPOTHESIS

After the financial crisis of 1997, the International Monetary Fund has reduced its efforts to open capital markets around the world. But many experts are of the view that the efforts for capital flows will start with new force after passage of some time. Ethiopia and IMF relationship will be quite interesting to evaluate. BACKGROUND The literature on IMF program evaluation and survey of much of the earlier research in this area revealed that tighter monetary programs are being designed to bring down inflation, which may necessarily entail output costs.

The relationship between intermediate policy targets and the inflation objective is developed. The strategies are drawn after taking into account the threat that could not have been anticipated when the program was designed and the targets and objectives were set. Additional performance criteria are often set on structural reforms. These are not derived directly from the financial programming framework but are made to support the policy targets. Program numbers are the IMF staff’s projections of outcomes conditional on the member country’s achieving certain policy targets and adequate implementation of other elements of the program.

IMF tests the validity of its programs by taking limited number of observations per country; however, in this specification, there are, on average, only three to four observations for each country. Since time-invariant, country-specific heterogeneity can be an important source of bias–which could contaminate our results–we include a complete set of fixed effects in all subsequent specifications. IMF & ETHIOPIA FIASCO The East Asian financial crisis of 1997 has weakened the efforts of the IMF to free up the capital market.

Although they are resolved to take steps for further freeing up capital market but pace of their activities has certainly slowed down. Financial activities and expansion has become major factor in the policies of major industrial countries. They want to see no restrictions in the capital flows. It is quite likely that the Fund will move again to secure the lifting of restrictions on capital movements. The IMF introduced a program called the Extended Structural Adjustment Program (ESAP), for providing access to credits.

ESAP membership mattered not just because of cheap Fund credits, but these credits were provided conditionally. IMF wanted those countries to meet a variety of conditions set by the Fund to be eligible and was granted membership. The funds were disbursed in tranches. The tranches were released only when the countries met the conditional ties within a specific framework. These conditions were directly related to all the sectors of economy from banking to foreign exchange policies.

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