Ethiopian government Devaluation strategy

25 Oct

Ethiopia’s Central Bank announced Wednesday that the birr has been devalued from roughly 13 ½ birr to the dollar to nearly 16 ½ birr, a one-day drop of about 17 percent.

Devaluations are most often associated with developing countries that don’t allow their currency prices to float freely on the open market. Planned devaluations are brought about almost exclusively by government decisions to deliberately reduce the relative value of a currency, usually intended as a means to some improvement in the country’s trading position. Therefore, this week Ethiopian devolution can also be categorised as one of the planned decision by the government. The real question is “Does the ethiopian government worked hard, to bear the outcomes.”

The reaction from a leading bank and investment firms

Ethiopian government Devaluation strategy

Given the apparently little justification for a large devaluation from a short-term macroeconomic perspective, we see more longer-term and structural motives for the authorities’ actions. More specifically, we think there is now a conscious effort to experiment with a deliberately undervalued exchange rate (the “China Model” one might call it) and to pursue a more aggressive strategy of import substitution.

Local Speculations

“The devaluation process is a purposeful measure taken by Prime Minster Meles as his continues surprise gift to New Year eve. The other will continue………….No, no no noooooo this is one of Mr. Melese’s final thesis work for his PhD in Economics” Local Speculations.

World wide reactions

“The IMF welcomes this move given it will help bolster Ethiopia’s competitiveness,” IMF representative in Ethiopia, Sukhwinder Singh, told Reuters. “It will need to be supported by appropriate monetary policy.”

“Years of high inflation have eroded the country’s export competitiveness, and the government has continually favoured sharp currency depreciations to counteract this,” Joseph Lake, an analyst at the Economist Intelligence Unit, told Reuters.

“I think it’s related to the new five-year plan and a strategy of export promotion and import substitution,” Tewodros Mekonnen, an economist with local think tank, the Ethiopian Economic Association, told Reuters.

“Though inflation has eased in recent months, this pattern of currency depreciation is likely to continue. Low levels of foreign exchange reserves, and twin fiscal and current-account deficits will continue to put pressure on the currency,” Lake said.

“Does Devaluation Make Sense in Ethiopia Now?” Addis Fortune

Economist says devaluation is a double-edged sword.

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