Samson Tsedeke
One-time Devaluation or Market Release?
We have learned from various sources that the issue of whether to devalue the Ethiopian Birr or take other alternative measures is becoming imminent. Particularly, diplomatic missions and non-governmental organizations that pay salaries in dollars are rushing to return foreign currency to the banks. This urgency stems from concerns that the government may soon implement various legal measures if the Birr’s foreign exchange rate is devalued.
The International Monetary Fund (IMF) board is expected to discuss a loan for Ethiopia next Monday. Typically, before the IMF board approves a loan, the issue is first addressed at the staff level and then submitted to the board. However, the scheduled IMF board meeting for Ethiopia on Monday is unusual in its timing.
What Have We Heard About the Potential Devaluation of the Birr?
Prime Minister Abiy Ahmed’s government has practically demonstrated its commitment to opening up the foreign exchange market by emphasizing that devaluing the Birr will boost foreign trade. Initially, when their administration was less than two years old, the value of one US dollar, which was 27 Birr, rose to 57 Birr due to rapid devaluation. At the time, the government was implementing the first “Economic Reform” program, and expectations for up to 10 billion dollars in loans from the IMF were high. However, due to the politicization of the Grand Renaissance Dam and the outbreak of war in the north, the loan from international financial institutions, including the IMF, was delayed.
After the Pretoria peace agreement, negotiations between the Ethiopian government and the IMF have advanced through many stages, culminating in today’s discussions. Recently, Prime Minister Abiy informed the House of People’s Representatives that Ethiopia would secure a 10.5 billion USD loan from these institutions. Sources close to the matter indicate that if the negotiation concludes successfully, Ethiopia may secure between 6 to 7 billion USD. The Ethiopian government has also met various preconditions, including tax, banking regulations, and enabling the government to obtain funds from the National Bank, making the National Bank a bank guided by interest rates.
The only remaining issue appears to be the foreign exchange rate of the Birr. the Abiy administration, in its efforts to secure the loan, has agreed to devalue the Birr’s foreign exchange rate between 15 and 20 percent and to devalue the Birr periodically. This measure is expected to be implemented soon.
Concerns Regarding Devaluation of the Birr
Devaluing the Birr’s foreign exchange rate could have significant implications for Ethiopia, a country that imports essential goods from abroad. Such a move would undoubtedly result in a severe price increase. However, it is believed that countries undergoing economic reform must pass through such preconditions.
During the negotiations, one major concern was the potential increase in government development agency debt due to the devaluation. Additionally, banks and development organizations, which value their assets in dollars, could be adversely affected. Recently, the government took steps to increase the capital of the Commercial Bank of Ethiopia by 650 million USD and transferred 900 billion Birr debt from government development agencies to the Ministry of Finance.
Will Devaluation Boost Foreign Trade?
It is often heard that countries experiencing high import costs must devalue their currency to strengthen their foreign exchange reserves and boost foreign trade. Ethiopia has previously experienced similar scenarios in 2003 and 2010 when the Birr was devalued. However, experts familiar with the issue and former employees of the National Bank of Ethiopia argue that devaluing the Birr did not result in increased foreign trade.
Before two years, Prime Minister Abiy Ahmed noted that Ethiopia’s foreign trade revenue exceeded 4 billion USD, attributing an additional 1 billion USD to the devaluation of the Birr. However, financial experts argue that the rise in global prices of agricultural products, including coffee, due to the Russia-Ukraine war contributed to Ethiopia’s increased revenue rather than the devaluation of the Birr.
Therefore, devaluing the Birr’s foreign exchange rate may lead to price increases rather than boosting Ethiopia’s foreign trade.
Devaluation Concerns and Foreign Trade
Indeed, devaluation has provided competitive advantages for countries with high production costs. However, for countries like Ethiopia that import fuel worth 4 billion USD and export coffee worth 1 billion USD, devaluation tends to lead to price increases rather than improving foreign trade competitiveness. Recent years have shown that devaluation often results in inflation rather than boosting foreign trade.
Source: Wazema