Ethiopia had made at least five devaluations since the introduction of a mixed economy in the country, 27 years ago. The intention was to make the overvalued currency competitive, aiming to overcome the scarcity of foreign exchange by promoting export and discouraging import. The gain, however, from all the devaluations has always been questioned. Now, even though Hailemariam Desalgen's Administration is confident that the devaluation will bring a positive change to the economy, the move seems to have brought the shock before the reap, reports SAMSON BERHANE, FORTUNE STAFF WRITER.
Reinforcement bar retailers, like Ashreka Wudemetas, felt the pain of Ethiopia’s currency devaluation well before the benefits.
Prices of rebar- a type of reinforcement steel used in construction- showed a 35pc increase in all retails found around Teklehaimanot, Merkato- the largest open market in the Capital. The price increase varies from 12 Br to 86 Br depending on its grade.
“It was expected,” said Ashreka, who has also been through the last devaluation in 2010. “Shortage of products and a surge in prices are likely during such periods.”
A day after the devaluation, over half of rebar sellers around Teklehaimanot were unwilling to sell a single rebar to customers, hoping the price increase will result in a spike in their earnings, while others chose to sell by raising their profit margin.
With the exception of the rebar produced by Steel RMI, which has made a price adjustment of 2.5 Br a kilogram, it was hard to find the products of many steel manufacturers in the open market as they were not willing to supply their products.
“It is just a coincidence. Our price adjustment has nothing to do with the recent devaluation, rather it is due to a rise in scrap prices,” said Tefera Lemma, General Manager Policy & Operation. “The effect of the devaluation is yet to be seen.”
A price increase of about 25pc was also observed in steel pipes and sheet-metal sold in Merkato. The rise is much higher in retail shops found in smaller markets such as Qera, Saris, and the like.
Not only rebars, but the price of goods and services in the capital city has also been ballooning over the past two days following the devaluation made by the Central Bank in a bid to make the country competitive in the global arena.
Seeing its most significant drop in seven years, the Ethiopian Birr has plummeted 15pc against the dollar on Tuesday, after the Central Bank devalued the currency to deal with the deficit in foreign reserves.
Signalled by President Mulatu Teshome (PhD) at the opening of the Parliament and a day before being publicised by NBE, the sudden plunge resulted in a dollar being sold at 26.9 Br from 23.4 Br a week ago.
By bringing the Ethiopian Birr down to a fair value, the devaluation promises to draw capital into the country and end the forex crunch that has plagued the economy for years, according to Yohannes Ayalew (PhD), vice governor and chief economist at the Central Bank.
Nevertheless, the move of the Bank to tumble the currency is not welcomed by housewives such as Meseret Tsige, who is already fed up of the price surge in consumable items.
Meseret, a mother of three, living around Sebara Babur- is amongst those who witnessed a price hike while shopping for edible oil in a kiosk just 200 metres from her home.
“In a matter of two days, the price increased by 20 Br from 330 Br,” said the housewife, who prefers ‘Omar’ edible oil. “If we see such a jump in two days, I don’t know what will happen in a week or a month.”
The unprecedented attempt of the Central Bank surfaced at a time when the inflationary pressure reached 10.8pc in the past month. It was driven by an increase in prices of food products, especially cereals such as maize and beans.
Many foreign companies including the renowned leather processing company, Pittards, who owns five glove factories in Ethiopia, was forced to alter their balance sheet after devaluation. The adjustment would amount to approximately one million pounds as estimated by the century-old firm.
“Despite the adjestment, it is a positive development for Pittards, as it will make our operation in Ethiopia competitive,” says the statement of the Board, chaired by Stephen Yapp.
The effects have also been felt in the oil market, where buyers are preferring to purchase some products in bulk, fearing that prices will rocket after the devaluation. Hoping to get a significant return in case of a hike, many oil franchises are procuring large amounts of petroleum products than usual.
“The market will become robust,” commented an employee close to the marketing department of Oil Libya.
The consequences of the devaluation are not only noticed in commodities but also in the parallel market, causing a rush on dollars as people become eager to buy foreign currencies as opposed to the regular trend.
“Demand for the hard currency showed a drastic increase,” said Fekir Getahun, a dealer in the parallel market
A day after the devaluation, amongst the five people he met in six hours, four came to buy foreign currency at his place located behind the National Stadium. In his working area, a single dollar fetches as high as 33 Br up from 29 Br, a day before the devaluation.
“It led to a shortage of foreign currency since most vendors preferred to hold rather than sell,” Fekir stressed.
Similar problems were observed during the previous devaluation that occurred seven years ago. The value of Birr was devalued by 20pc, resulting in a proportional swell of foreign currency in the parallel market. Also, Birr was devalued by 10pc, nine percent and five percent in October 2008, July 2009 and April 2010, respectively, under the late Prime Minister Meles Zenawi, who addressed devaluation as “the last and inevitable pill to swallow”.
Devaluation only occurs in countries adopting fixed or pegged exchange rate systems, where the value is not determined by the market forces- demand and supply. It reflects the existence of severe economic problems such as trade imbalance and slump in international competitiveness.
The essence of devaluation in Ethiopia reflects a wide gap in the trade balance. Export proceeds stagnated at around three billion dollars for the past three years, and import bills reached as high as 17 billion dollars- resulting in a trade deficit of 14 billion dollars.
“The widening gap necessitated the devaluation of the currency,” said Yohannes, in his interview with the state-owned broadcaster, Ethiopian Broadcasting Corporation (EBC).
Although Hailemariam Desalgen’s Administration is confident enough that the devaluation will foster change in the economy, the move seems ill-advised for the three-decade experienced economist.
“It is a regrettable and misguided decision,” Alemayehu Geda (Prof.) reacted. “It is puzzling why the government prefers devaluation despite knowing the major challenge faced by exporters is not foreign currency.”
Over 70pc of exporters in Ethiopia face difficulties is acquiring land, whereas the remaining complain about corruption, bureaucracy and power outage, as surveyed by Alemayehu three years ago.
“Out of 100 sampled exporters, none of them attributed their underperformance with the issue of foreign currency,” Alemayehu, the researcher, underscored.
This year’s devaluation emerged almost a year after one of the major external financiers of the country, World Bank, recommended the government to adjust its exchange rate, hoping to bring the country’s overvalued currency down to the earth.
For the Bank, Birr was overvalued by 84pc after the devaluation made seven years ago.
It argues that devaluating the currency will cheer exporters as they will be showered with more money for every dollar of goods shipped abroad while making imports expensive. Also, the Bank believes it will encourage remittance.
Nonetheless, the positive outlook of the Bank does not seem convincing for Alemayehu. He doesn’t see the minimising effects of devaluation in a country whose large chunk of imports are not amenable to reduction.
A closer look at the components of Ethiopia’s trade reveals that fuels, capital and intermediate goods comprise over 70pc of the country’s imports.
“Ethiopia will import such goods whether they are expensive or cheap. They are basic, not a luxury good,” he said. “Also, since Ethiopia’s exporters are a price taker in international trade, they will make no change even though the currency’s value diminished.”
Tadele Ferede (PhD), a three-decade experienced economist and lecturer at Addis Abeba University, see the devaluation with a different eye. He thinks that it will have a serious contribution to the tourism industry as services will be inexpensive for visitors, but not without costs.
“It must be noted that it will increase the expenditure of the government and growth in money supply,” the economist remarked. “This will reflect the existence of inflationary of pressure post devaluation.”
The after-effects of the previous devaluations in Ethiopia resulted in an inflationary pressure of beyond 60pc, putting burden the low and mid-income earners. During the last devaluation in 2010- the same year when the country launched the first edition of growth and transformation plan- inflation peaks to 38pc from being less than 10pc before the adjustment in the exchange market.
“History will repeat itself,” Alemayehu commented. “A headline inflation of 30pc will haunt the country very soon.”
Furthermore, some experts argue the overall effects of the devaluation will be severe in less regulated areas.
“The consequence of the devaluation will knock on doors of landlords,” Abdulmenan Mohammed, a financial expert with two decades of experiences.
For him, the defining characteristics of housing are lack of competition, shortage and non-existent regulation.
“Hence, the price may hike unpredictably,” he said.
There are also fears that devaluation might inflate the government’s debt and state-owned-enterprises, that has reached 23 billion dollars as of March 2017.
“From accounting vantage point, the devaluation will increase external debt by tens of billions of Birr,” he said. “Yet, without doubt, the debt and interest repayment of this fiscal year will be much higher than the amount in the annual budget.”
The worry over the recent devaluation comes as the country faces a record high budget deficit- projected to reach 2.5pc of the Gross Domestic Product by the end of this fiscal year.
Hoping to offset its effects, the Central Bank had issued three directives after the currency rate adjustment last week. It instructed all commercial banks to transfer 30pc of their Forex earnings and 100pc of their windfall profit to its accounts, as well as allow exporters to retain the 30pc Forex they generate. It also lifted the deposit interest rate from five to seven percent.
Yet, this does not hold water for Alemayehu, the economist.
“Lowering government expenditure, putting a credit cap on banks and tightening monetary policy is the only solution left for the government to reduce the effects of its misguided action,” he concludes.
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