Devaluation: Foolish Gambling with the Public’s Money
For those who have followed the EPRDF’s monetary policy concepts from the first aggressive decision to devalue the Birr by 241 percent in October 1992, one can easily ascertain what this percentage means. Over the last 19 years, the government has continually tampered with the Birr. Devaluation of 800 percent occurred during those years, as if it were the only available instrument to stabilize the economy.
Yes, it is 800 percent! No need to speculate any longer. For those who have followed the EPRDF’s monetary policy concepts from the first aggressive decision to devalue the Birr by 241 percent in October 1992, one can easily ascertain what this percentage means. Over the last 19 years, the government has continually tampered with the Birr. Devaluation of 800 percent occurred during those years, as if it were the only available instrument to stabilize the economy.
If we continue our calculations in the same manner, we understand that the currency was devalued, on average, by 42 percent yearly. This implies that if the neighbouring Kenyan currency maintains its strength of today, after seven years one Birr may equal one Kenyan Shilling, quid pro quo. At present, one Birr is exchanged for around 6.17 Shillings. Happily, no projection mentioned in the government’s Growth and Transformation Plan predicts such results.
Yet, that does not truly explian the Ethiopian government’s old-fashioned “stabilization” mechanism. Before the devaluation of the Birr by 17 percent was announced on September 1, 2010 this instrument was applied in a systematic way over different time periods, considered a primary, sufficient tool. If we take, for instance, the year 2009 as a mark-up, the National Bank of Ethiopia (NBE) again applied the instrument of devaluation in response to rapidly deteriorating foreign reserves. As foreign reserves accounted for just US$870 million at the end of 2008–covering a maximum of a single month’s imports–the only action the government took throughout that time was devaluing the currency by 5 and 10 percent (on January 9 and July 13, respectively).
Chasing the Birr!
It seems that the EPRDF is “falling in love” with chasing the Birr in response to all economic evils. If there is something wrong in the economy or the IMF cautions the country against the weak performance of the financial sector, it is so easy for the government to see devaluation as the only way out.
Last week’s devaluation was not unexpected, although it is the biggest such action taken over the last 18 years. According to data and sources from the NBE, the severe shortage of foreign reserves that resulted from the weak performance of the export sector forced the government to reach this uncomfortable decision. As Finance and Economic Development Minister Sufian Ahmed and NBE Governor Teklwold Atnafu clearly stated in their IMF “Letter of Intent” on April 28 2010, in order to meet the external reserves target of US$212 million over 2.3 months of imports in the fiscal year 2010/11, the government was ready to adjust exchange rates in the very near future.
Addis Neger Online’s sources and economists also believe that the IMF might have forced the government officials into introducing the huge devaluation. “I suspect that the IMF may have required the authorities to go for a large devaluation as a precondition for further financial assistance,” said a former distinguished expert at the NBE. “The Fund may have agreed to let Meles pretend that the measure was his and not one dictated by the Fund” the expert added.
Unfulfilled Wish
Taking a theoretical explanation out of a number of schools of thoughts, devaluation may be able to reverse the imbalance in trade by lowering its price to encourage exporters, while imports decline if–and only if–the Marshal-Learner condition is fulfilled. The Marshall-Lerner condition states that a devaluation of currency will only cause a trade balance surplus in the short run if the combined price elasticity of demand and price elasticity of supply are greater than 1. If they are not, then the devaluation will reduce the size of the trade deficit but not remove it.
Despite the fact that the Ethiopian government’s intention behind the currency devaluation was to boost exports and shrink imports, it has never been successful. Rather, the economy has suffered shortages of imported goods accompanied by a high inflation rate on domestic products. Similarly, the trade balance has not improved over the last 19 years.
According to a recent study-The Impact of Devaluation on Trade Balance- by Haile Asmamaw, devaluation simply cannot improve the trade balance of Ethiopia. The exports do not sufficiently increase following devaluation in order to outweigh the increased imports. As the researcher clearly points out, because most imports are critical to growth, and domestic consumers display a strong preference for foreign goods over domestically produced goods, devaluation does not improve the trade balance at all.
Recent empirical evidence also shows that the country’s trade balance deficit outweighs its budget. During the current fiscal year, the IMF also estimated a trade deficit of US$7 billion. In the worst case, there will be no room for positive changes concerning domestic imports and exports. As Addis Neger Online sources reported from Addis Ababa, prices began to increase as soon as the news of the devaluation was released. This is Meles Zenawi’s gift of the New Year, with love.
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Opposing the policies of a government is one thing but blatantly denying facts is an other thing. It is a well known convention in economics that devaluation is one the most effective means of import substitution and export promotion. we all know that one of the reasons for the 2008 inflation was lack of forex in addition to the int’l price spike, particularly, of oil. And we have witnessed last year the combined effects of 2009 devaluations and other monetary and fiscal policies. Forex reserve has increased to about 2 billion and inflation to 3%. Trade has shown surplus of 400 million in 2009/10..with export growing at alarming 35%. LETS NOT THROW UNINFORMED BLANKET ‘OPINION’ !! see the foollowing for more …
http://www.addisfortune.com/ecconomic_commentary.htm
This is the lowest piece that i have seen so far on any topic on Addis Neger.
What ever the argument is about the decision, life is getting more difficult for people living here in Ethiopia, Expensive
Export grows when there are goods to export. Currency devaluation in the Ethiopian case is not going to increase export substantially. For obvious reasons. EPRDF lovers are arguing this will increase exports. What a joke it will make life hard on people
For those that do not understand the mathematics of the devaluation, especially over the time that TPLF/EPRDF has held a tight reign on the economic ability and freedom of Ethiopians, I suggest that you ask yourself two questions:
1. How many more Birr will I need to pay for my dabo, sega, beer?
2. If we are supposed to export more as the Birr is almost without value, what products does Ethiopia export and how many more units do they have to sell for less money to have the real income as previously?
Finally, simply think of a 17% devaluation as a deflation of the economy. After all, Ethiopia is the second poorest country in the world and now has the ability to become the first most poorest.
Metoo
Generally speaking, devaluation of own currency helps countries like China that exports more than imports.
When it comes to ethiopia,the balance of trade in 2009 shows a USD 5.4 Billion deficit (USD 1.6 Billion export versus USD 7 Billion import). That means devaluation of its curency expected to do more damages than benefiting the economy.
The 20% devaluation means that Ethiopia has to increase the quanitity of export goods by 20% just to get the same amount of foreign currencey it obtained the previous year(assuming every other parameter remain the same). To increase its export earning Ethiopia has to increase its export amount by more than 20%, this also depends on the international prices of its export goods among other things.
The price of imported goods will increase by at least 20% from the previous year (assuming every other parameter remains the same) The price of impoted goods may eventually be lowered when they become subsituted by local productions. But in Ethiopia it takes too much time for industries to get the necessary input and begin production. In the meantime, price of goods will too high in the local market and too cheap in the international market.
The winner in this game is the foreigners who will pay less for export goods and their money also worths more when they spend locally as tourists.
It is a win-win for foreigners and a loose-loose for Ethiopians, until substituition of imports is realized(which is like I have a cow in the sky)
Economics for dummies (meant it in good way)-:)
Thank you!
That was what they aimed to achive. It will not take 7 yrs(as you guess)to catch up Kenya Shillings, as we were fast enough to exceed Nakfa..IoI
Happy new year!
Dear the DC Arbegnoch ginbar:
If the Ethiopian currency be stayed as it was: – $1= 2.75birr, what it means for you?
As our old boss said “dollar” while the Wollo people dying of hunger. so if the money stayed the way how it was means is the money is the hero who defeated Italians or what? Even if, if I am not Bernanici (the US economist) where ever, I can guess that our population is tripled and we are least economy than every body in the world, even Kenya, We have nothing to compare to other economies. If birr is devalued or not it doesn’t make our economy rich or poor, The devaluation of the birr for my guess is, it will attract more investors to the country. I think the government is balancing the country, the population with our economy. I believe those people who did the devaluation were well educated experts. The DC confused palltalk heroes are not the only people who educated or they have to consult experts. Opposing, Opposing, Opposing? Stay away from Ethiopia and establish your own government in DC as the way how you are pocking and oppressing every body in DC. Leave Ethiopia and Ethiopians alone.
Dagnachew
We are Ethiopians too. In fact we are the majority your side is the minority. In your eyes only TPLF members are allowed to talk about Ethiopia. The rest of us should be gagged. Unfortunately for you this is not TPLF run Ethiopia. This is the land of the free. If you have an argument make your case. If not – I understand it has become increasingly difficult to defend TPLF – But do not threaten us or try to silence us. We will be telling the truth and keep exposing TPLF
If the aim is to increase our export, as some say, then I think devaluation in Ethiopia’s case is the wrong prescription.
Let’s see what we export. Coffe, hides and skin, chat, sesame to mention the major ones. Right now coffee and the likes are commanding the highest price in the world market. Devaluation or not we are selling all we can deliver. No coffee or other exportable products are laying there to waste. Devaluation can only mean earning less, because we will be selling the same amount right now or for the forseeable future.
So, where is the benefit of devaluation here?
Ahhha! may be chat can be banned from the Ethiopian market and all quality of it will be exclusively sold to neighboring countries as it becomes affordable and available. Oh! I am dreaming!
Some of the commentators seem to mix politically motivated comments instead of the issue at hand. One speaks about the tight grip TPLF has and the fact that the people are not free etc. Ethiopians are freer now than any time in their long history. I am 50 years old and in my life time I have not felt this free. Thus stick to the issues and do not try to confuse the audience with your politically motivated messages.
Tes,
You mean yours was not Politically motivated. What freedom are you talking about. A government that has the largest number of political prisoners. A government that rigged elections all the time. A nation where people are afraid to express their view. A nations that has the highest number of journalists in jail or on the run. A government that jams all radio stations that it does not control. This is freedom.
The ruling class was always free – you are part of the ruling class. The dictators feel free in dictatorship. The overwhelming majority of Ethiopians are not free and do not feel free. I am amused by how TPLF members attempt to act neutral in discussions for them being TPLF partisan is being neutral. If saying things are bad in Ethiopia and the nation is being ruled by ethnic minority bent on staying in power by any means is being politically motivated so be it.
The policy of devaluation with a-one-man government almost always is for the wrong reasons. The import substitutions argument is further to confuse the voodoo economics of woyane with coffee, flower and a few commodities export noting much to produced to substitute import.
Devaluation by itself is not bad policy by itself if the governments get out of trade and concentrate in policy making. With insider trading and money printing ability IMF is only concerned with regime debt servicing and preventing the economy from collapsing that is all.
I am sick and tired of the government supporters coming with off the wall argument.
Tes,
Are you talking about a different Ethiopia? in the last five years we have lost all the little freedom we had before. If you look at the Private press, you might feel you are reading Addis Zemen
Not only the governmet is to be blamed for this. The public at large too is responsible. It has been very docile and dumb all along. As long as the cost of whatever blunder and plunder government officials do is to be carried by the people, they wouldn’t stop making such whimsical acts. Whether the government takes myopic and reckless foreign and economic policies it is the people who stand to absorb its effect. The brunt of the War with Eritrea and Somali impacted only the people. The abject poverty and starvation following inflation and mismanagement of resources will again be quietly taken by the passive public. Why the government care about whatever effect their decisions might bring?
http://ecadforum.com/blog/?p=4154
can somebody tell why the IMF Welcomed this move?