Valuation of an Ill-advised Devaluation

The National Bank of Ethiopia announced its bombshell decision almost a couple of weeks ago. The country's currency will be 15pc less valuable than it has been most of the past fiscal year, selling close to 27 Br for every dollar. The devaluation has its supporters, like international financial institutions, and its detractors. While the government is hoping for higher export earnings, consumers are bracing for a rise in inflation. Only time will tell what the actual outcome would be but measures should be taken to ensure that the devaluation is for the better.

The Ethiopian People’s Revolutionary Democratic Front (EPRDF) dominated government has devalued the Birr at a time when more urgent problems are at play. Issues like the ballooning external debt of the country which, after the devaluation, are only going to get worse.

In his opening address to the parliament, after the legislative body’s long recess, President Mulatu Teshome (PhD), enumerated a long to-do list that is to be carried out in the next couple of years. His speech was only a prelude to the National Bank of Ethiopia’s (NBE) surprising decision to slash the value of the country’s official currency by 15pc.

As far as the concept of devaluation goes, the timing of the declaration, and the financial circumstances that necessitated it raise a multitude of questions. Devaluation, which in essence is the downgrading of the currency, was done with specific objectives in mind. In this case, it is expected to encourage export. But this does not come without a cost. Exporters would not see their domestic prices decrease, in fact, they may even increase.

And a decrease in prices alone does not help exporters as little work has been done in successfully introducing the country’s exportable items, like coffee, to the international market. I remember once coming across a cab driver who tried to convince me that coffee did not come initially from Ethiopia and that Arabica Coffee is not indigenous to the country.

The impacts of devaluation need to be carefully assessed and analysed in a manner that would at least reduce  the risk of inflation. In a mostly agrarian society, that mainly relies on rainwater to produce crops to this date, and an industry sector which is still in its infancy, with many people having to rely on goods and services that are imported, a devaluation will inevitably end up in a price hike.

But the devaluation is not all bad. One of the sectors that could benefit is the service sector, by way of the tourism industry. Ethiopia’s world-renowned natural, human-made and intangible heritages could be of great use at this moment. Tourists can now rest assured that the currency they bring would be 15pc more valuable than just two weeks ago.

I am convinced that the elites, economic advisers and supporters of the ruling party are bound to justify the devaluation for at least two reasons. It is either party partisanship or international financial institutions’ advice whose loans the country can barely do without.

Mulatu’s speech to the members of the Parliament was merely a precursor and not an essential issue. Although he hinted at it, few expected that the devaluation would be announced only a day later by such significant percentage points.

The Birr has been devalued four times during the last 10 years in the hopes that it would fix the country’s trade deficit. But it never did, imports have only increased. And considering this, when something of this nature occurs again, there should have been a thorough justification for it.

It begs the question, do policymakers really know what it takes to make the economy great? Who prescribed it and why? What do they intend to get out of this very crucial measure?

These are very vital questions that had to be answered before the devaluation took place. At the very least, the lessons from 10 years ago should have given the government some food for thought.

Nonetheless, now that it has occurred, the next logical step should be to find a remedial action. For an economy already in troubled waters, it would be a while before we get to see the fruits of the devaluation (if there are any).

We should encourage Ethiopians who live overseas to remit more. But this is hampered by the fact that we do not allow locals to hold foreign currency accounts. This could have helped us prevent the channelling of remittances through the informal sector.

The government could also work harder on import substitution. It should not always be about trying to meet the level of imports by exporting more but simply decreasing the volume of the former. It would be easier to do this, not by discouraging imports, but by encouraging local manufacturers to produce more.

Indeed, in the short run, devaluation will wreak havoc on the consumer’s pockets. But specific steps can be taken to improve the situation. Of course, the fact that the devaluation has taken place at a time when the unity of the country is at stake and peace is still precarious does not help.

By Girma Feyissa

Published on Oct 21,2017 [ Vol 18 ,No 912]



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