Ethiopia may lose global competitiveness from overvalued currency, World Bank says

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The Real Effective Exchange Rate in Ethiopia has increased in the last two years leading the country to possibly lose competitiveness in the global market; it was stated at the World Bank Groups’ 5th Ethiopia Economic Update launched on December 6, 2016.

Presenting the findings of the report, Michael Geiger who is the co-author of the paper stated that the fact that Ethiopia has over valued its currency means that it will not be able to compete with other countries in the international market and it has become one of the reasons for the low export performance.

“One issue that contributes to the export performance in our view is the real effective exchange rate and the fact that it has appreciated substantially over the last two and a half years. In the middle of 2010 there was a nominal devaluation for a short period of time it went down.  The real exchange rate increased again between 2012 and 2013,” Geiger stated.

One of the major contributors to increasing real effective exchange rates is inflation rates, he further said. The findings show that between 2011 and 2013, the inflation rate was very high making it the driving force for the appreciated exchange rates.

“Looking at how real exchange rates in Ethiopia have developed compared to its neighbors; while the country’s rate went up over the last two years, the other countries have been stable or have devalued. If these are the countries Ethiopia is competing with on the international market, it is losing competitiveness.

Looking at this year’s inflation rates, the report shows that food related Inflation has come down largely because the government has imported a large amount  of wheat.

“Normally when the country imports wheat it is about one million metric tons, and last year it was 2.5 million metric tons which showed that the government was able to increase wheat imports. The way the strategic reserves have been employed for the past year shows some of the resilience in the country. What we have seen is that the regional grain reserves have been employed in the regions where there was no drought and distributed to the regions where there was drought. This is the major reason for the low core inflation,” Geiger stated.

According to the report, growth momentum in the country will still remain. Medium-term economic growth can be unaffected from the drought since the rains set in normally again in 2016/17.

In addition, the completion of the Addis Ababa-Djibouti railway line significantly eases trade and logistic related constraints. The commencement of new industrial parks such as the Hawassa and Bole Lemi Phase II, and the increase capacity in power generation with the completion of transmission lines to neighboring countries such as Sudan and Kenya are also expected to improve the export performance and stimulate growth in the short to medium-term.

On the other hand, potential negative economic effects of the current unrest make the outlook uncertain, it was said.