Gov’t Can’t Whack-a-mole, Must Instead Take Proactive Measures

Globalisation has complicated economics. In strategising, authorities have had to look very carefully at the economic outlooks of trading partners to measure just what could work, and could not. For instance, for the United States (US), merely a weak Chinese Yuan can complicate trade by making goods from the North American country expensive for that of the latter’s citizens. Or it will make Chinese products cheaper for Americans.

Such monetary policy implications are entirely within the frame of reference of the authorities at the National Bank of Ethiopia (NBE). The past fiscal year, they allowed the nominal value of the Birr to depreciate by over six percentage points against the dollar to counter an even higher appreciation in the real effective exchange rate. They attributed the latter to a stronger dollar compared to a basket of other major currencies and lower inflation within the economies of the US’ trading partners.

Taken in isolation, this is sensible decision making that considers the weakness of the economy in the state of the official currency. What remains, and what is highly detrimental to long-term stability, is the resolve to address the sources of such recurring fluctuations that are allowing the parallel market, a.k.a black market, to take a bigger slice of the pie.

Both fiscal and monetary policymakers, having long been passive, must also be outward looking for a weak dollar has multiple repercussions where trade and debt are concerned. It is not for long that the government can play whack-a-mole before the economy is fatigued, and is left worse off. This is especially detrimental now that the Birr is depreciating further than seems to be the case on the surface.

This dates back to the time when the central bank sought it best to devalue the Birr by 15pc to draw capital in for the nation. The currency then was selling for 33.5 Br for each dollar on the black market. The day the devaluation became effective, October 11, 2017, the dollar had a close to 93 point Dollar Index, which measures the value of the most exchanged currency in the world against a basket of six other major currencies.

Fast-forward most of the past week, and the dollar has depreciated. The Index value, despite fractional fluctuations, stood at around 90, compared to the aggregate average value of the Japanese yen, the pound sterling, the Euro, and three other currencies. Having started with a base value of 100 in the early 1970s, a drop by three points means a depreciation for the dollar by an equivalent amount of percentage points in comparison to its level on that fateful October day.

This value points that those six currencies have gotten stronger compared to the dollar, which the Index directly measures. But other nations can also use the Index as a performance indicator of the value of their currencies. If the value of their currencies relative to the dollar has strengthened during this time, then it is a good indicator of stability.

This is not the case for the Birr. For the government that has chosen to follow a forex regime known as managed floating, where the “manage” part often overshadows the floating one, it is seeing the market value of the nation’s currency further depreciating. Even as the dollar has shed six points, the Birr, instead of strengthening, has come to trade for a high of 35 Br for the dollar on the black market. And had the dollar been more stable, or worse, appreciated, the Birr could have been depreciating faster.

This betrays that the economy is doing worse than the case may be at first glance. It shows that the primary handicaps of the economy that have given rise to black market currency trading are getting worse and that the lacklustre external sector is about to take a hit. It further points to one more decision by the central bank, which was the devaluation of the Birr, that is failing to hit one of its goals, which is to reduce the gap between the two exchange rates. This will at least be the definitive evidence that the authorities have for long been barking at the wrong tree.

What is needed at this point is more vigilance at the currency that is the most exchanged in the world. As the dollar gets weaker, and the purchasing power of the citizens of the wealthiest country in the world lessens, exporters the world over could inevitably try to compensate by driving the prices of their goods upwards.

These could include such detrimental commodities that Ethiopia too, a net importer, is highly dependent upon. The most critical of these is fuel, which in the past fiscal year had cost the country over a couple of billion dollars. This will be a challenge to the authorities in that it will swell import bills and worsen the trade deficit, especially if the authorities continue to eye the United States as a major export destination.

There is perhaps little hope there in that the North American nation jumped from seventh to third place in the first half of the current fiscal year in terms of export destinations. More export to the United States will make the devaluation that aims to create price competitiveness even less effective for Americans purchasing power will not be as robust.

Such a phenomenon will further be complicated by the commitment not to float the Birr, peg it at a value the government deems appropriate, notwithstanding its actual market value, and then ration what little hard currency flows in based on the state’s measure of worthiness. This has left more and more people wanting, and satisfying their hard currency needs by way of the black market.

The black market for its part, gorging itself on the level of swelling demand, has improved its ability to supply more. As the dollar value on the parallel market has inflated, those looking to convert the dollar to Birr are further pushed there. This is to profit from the close to eight Birr windfall gain an alternative exchange rate affords them.

For a developing nation with many immigrants overseas, and where remittances exceed total exports of goods, the fact that more and more people are pushed to the black market will have adverse effects. It will inject more hard currency there. And it will impede the state’s attempt to import items that cannot otherwise be sourced domestically such as fuel or an adequate supply of wheat.

Against such odds, the authorities have remained tame. Sure, they recently drew up a directive in a bid to clamp down on under-invoicing that necessitates that every letter of credit (LC) matches the value of the imported item. But there is no sign that they are rising to the challenge to take advantage of a global shift in the value of the US dollar.

It is crucial to remember that this new trend with the dollar is not all doom and gloom. There are silver linings policymakers could build upon to bring about a competitive economy.

It is for instance not the worst time to take loans. Better, since most of Ethiopia’s debt is dollar-denominated, it would make it easier for the nation to pay back its debt. Policymakers thus need to take a closer look at the long-term plans of the United States’ government, especially that of the Donald Trump administration. It betrays that the dollar will further depreciate to capitalise on China’s substantial middle-income class that would be more likely to buy American goods if only they were cheaper.

Re-evaluating export destinations should also be another area of focus for the policymakers’. The Index shows that the currencies of Japan, member states of the Eurozone, the United Kingdom, Canada, Sweden and Switzerland are getting stronger, as will be the purchasing powers of the citizens of these nations. Reorienting exports to these countries, and amassing more of their currencies ought to allow Ethiopia to calm the chronic shortage of hard currency.

Similar proactive measures should complement a number of economic reforms that should have taken place long ago. Such as a more flexible exchange rate, akin to the one the black market exchange rate is exploiting, and thriftiness in capital expenditure.

The former will allow the country to pull the plug on the black market, for it will have little less to offer if the official exchange rate is just as flexible. The latter will bring health to the economy. It will allow it to wither such times as when shifts are occurring in the global economy as opposed to now where Ethiopia is starved for leverages to pull.

Published on Feb 10,2018 [ Vol 18 ,No 928]



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