Exchange Rate Development in Ethiopia
Exchange rate development in Ethiopia
Monetary Development
The legal tender currency of Ethiopia was issued on 23 July 1945 by defining the monetary unit as the Ethiopia dollar (E$) with a value of 5.52 grains (equivalent to 0.355745 grams) of fine gold. The linkage with fine gold was in accord with the monetary system established by the Bretton Woods Agreement of 1944. For the five years following the proclamation of the national currency (1945–1950), money supply of the country was determined by the balance of payments (reflected in the volume of currency issued) and the supply of domestic credit. However, the impact of domestic credit on money supply was small as the government was running a budget surplus; private credit was limited to trade (particularly external trade), consumer credit was unknown and other users of credit (such as manufacturing industries) were virtually nil.
Following the introduction of saving deposit, broad money came to the scene in 1946 with growth rate of 8.8% as compared to 17.3% growth rate during the 1945–1950period. This is due to the substitution of the national currency during the early years of the period particularly in 1945 and 1946. Nevertheless, the expansion of money supply during 1945/1946 had to be explained more by exogenous factors vis-avis domestic needs.
During the 1950–1963 period, money supply was explained by balance of payments and domestic credit. The impact of domestic credit on money supply was enhanced in response to growing economic activities. Thus, domestic credit came to play the dominant role in determining the growth rate of money supply in the 1950s and early 1960s. Money supply increased from E$259.6 in December 1963 to E$694.3 million in December 1974. Broad money also increased from E$306.6 million in 1963 to E$1,075 million in 1974. The main factor behind the expansion of money supply during 1964–
1975 was again the expansion of domestic credit to both the private sector and the government.
Monetary Development
The legal tender currency of Ethiopia was issued on 23 July 1945 by defining the monetary unit as the Ethiopia dollar (E$) with a value of 5.52 grains (equivalent to 0.355745 grams) of fine gold. The linkage with fine gold was in accord with the monetary system established by the Bretton Woods Agreement of 1944. For the five years following the proclamation of the national currency (1945–1950), money supply of the country was determined by the balance of payments (reflected in the volume of currency issued) and the supply of domestic credit. However, the impact of domestic credit on money supply was small as the government was running a budget surplus; private credit was limited to trade (particularly external trade), consumer credit was unknown and other users of credit (such as manufacturing industries) were virtually nil.
Following the introduction of saving deposit, broad money came to the scene in 1946 with growth rate of 8.8% as compared to 17.3% growth rate during the 1945–1950period. This is due to the substitution of the national currency during the early years of the period particularly in 1945 and 1946. Nevertheless, the expansion of money supply during 1945/1946 had to be explained more by exogenous factors vis-avis domestic needs.
During the 1950–1963 period, money supply was explained by balance of payments and domestic credit. The impact of domestic credit on money supply was enhanced in response to growing economic activities. Thus, domestic credit came to play the dominant role in determining the growth rate of money supply in the 1950s and early 1960s. Money supply increased from E$259.6 in December 1963 to E$694.3 million in December 1974. Broad money also increased from E$306.6 million in 1963 to E$1,075 million in 1974. The main factor behind the expansion of money supply during 1964–
1975 was again the expansion of domestic credit to both the private sector and the government.