Insights and Strategies for the Modern Research Environment
Edited by Friederike Welter and David Urbano
Chapter 5: Can you spare a dollar, please? Foreign exchange shortage as a persistent challenge to economic development
Chapter 5 focuses on foreign or reserve currency shortage and its implications for development prospects. It is argued that the problem of foreign exchange shortages is persistent, causing problems for some Developing and Emerging Economies’ (DEEs) by inhibiting their potential for growth. The provision of reserve currencies is necessary for financing structural change and the conduct of monetary and fiscal policies which proves particularly important in times of crises. However, unfavourable trade structures make it hard to acquire enough foreign currency as exports of primary commodities are a poor source of foreign exchange. If the foreign exchange finance gap is closed via foreign loans, the issue of debt sustainability arises. The chapter uses the case of Ethiopia to illustrate the dilemma consisting of dependence on foreign exchange, an undiversified trade structure and risks of overindebtedness.
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