According to the National Bank of Ethiopia Establishment (as Amended) Proclamation No. 591/2008 (herein after the Proclamation), the National Bank of Ethiopia, which is accountable to the Prime Minister, is the major government organ that regulates foreign exchange transactions in Ethiopia.
Who determines the exchange rate?
A fixed or pegged rate is determined by the government through its central bank. The rate is set against another major world currency (such as the U.S. dollar, euro, or yen). To maintain its exchange rate, the government will buy and sell its own currency against the currency to which it is pegged.
How are currency prices determined in Ethiopia?
Note: Since May 1993, the birr market rate has been determined in an interbank market supported by weekly wholesale auction. SOURCE: CIA World Factbook 2001 [ONLINE]. In this way, the official exchange rate is auction-determined.
Which exchange rate system does Ethiopia follow currently?
Therefore, the Ethiopian currency has been pegged to the US dollar at the rate of 2.07 birr per US dollar until the huge devaluation in October 1992. This fixed official exchange rate was left unaltered for two decades despite the floating of the major world currencies including US dollar.
How are exchange rates usually quoted?
Quotation. Typically, an exchange rate is quoted using an acronym for the national currency it represents. For example, the acronym USD represents the U.S. dollar, while EUR represents the euro. To quote the currency pair for the dollar and the euro, it would be EUR/USD.
What is the relationship between demand for foreign exchange and exchange rate?
Relationship. There is inverse relation between price of foreign exchange (rate of exchange) and demand for foreign exchange. When exchange rate rises, demand for foreign exchange falls and when exchange rate of foreign currency falls, its demand rises.
What is US dollar backed by?
In contrast to commodity-based money like gold coins or paper bills redeemable for precious metals, fiat money is backed entirely by the full faith and trust in the government that issued it. One reason this has merit is because governments demand that you pay taxes in the fiat money it issues.
What is the currency of Ethiopia money?
What is the evolution of money in Ethiopia?
In 1903, a quarter birr, and 1/16 birr known as a ghersh began to circulate in Ethiopia, and the official accounting currency became 1 birr = 16 ghersh = 32 bessa. In 1915 the Bank of Abyssinia released banknotes, but they were used primarily by merchants and foreigners.
Does Ethiopia have a fixed exchange rate?
Ethiopia follows a fixed currency regime pegged to the US dollar and because it is currently overvalued by up to 12-18% according to the IMF[xiii], the government has to sell reserves to maintain this fixed exchange rate.
How does exchange rate affect economic growth?
A strong exchange rate can depress economic growth because: Exports more expensive, therefore less demand for exports. Imports cheaper, therefore more demand for imported goods (and therefore less demand for domestically produced goods) … But, high-interest rates reduced the rate of economic growth.
What are the determinants Ethiopians demand for US dollar?
In general, the paper found that in Ethiopia money demand is affected by several factors. Among these determinants of money demand are real GDP of the country, the expected inflation, real effective exchange rate and the real money balance. Demand for money plays a major role in conducting appropriate monetary policy.
Does devaluation improve the current account of Ethiopia Why?
Taye (1999) applied a macro-simulation approach to a macroeconomic model for Ethiopia. His results indicated that devaluation has a positive impact on the trade balance because of the reduction in imports and stagflationary via its impact on output and employment.
What is direct rate of exchange?
A direct quote is a foreign exchange rate quoted in fixed units of foreign currency in variable amounts of the domestic currency. In other words, a direct currency quote asks what amount of domestic currency is needed to buy one unit of the foreign currency—most commonly the U.S. dollar (USD) in forex markets.
What does an exchange rate tell you?
An exchange rate tells us how much of one currency we must pay to receive a certain amount of another. We quickly learn that exchange rates do not guarantee or stabilize the buying power of our currency.
What is meant by rate of exchange?
Definition: Exchange rate is the price of one currency in terms of another currency. Description: Exchange rates can be either fixed or floating. … It is the floor price that must be paid irrespective of the market price.