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Why the devaluation? Is it a good move for Ethiopia’s economy, and the birr in the near term? Will inflation increase dramatically? Was there any alternative? Last week these questions were repeatedly asked in the media and in private conversations. Pundits tried to explain or answer the questions, some convincingly, others less so.
Meanwhile the jury is still out as far as the 2010 currency devaluation is concerned whether it has improved the life of the lots or gave way to further misery.
Indeed, despite 17% devaluation… export has not grown as expected … competitiveness declined… production capacity has stagnated… Moreover when the data over the past six years are examined, we see a linear increase in imports, and a continuously mounting deficit. By and large the problems with Ethiopia’s economy remain structural, where income is not growing fast enough to beat inflation, and where investment in the production sector is deficient. The 2010 devaluation did not achieve its objectives. So what will this new devaluation achieve, except for impoverishing us all!
As for inflation it was already heading north, but this time its increase may not be as big as the currency’s fall, partly because substantive amount of imported consumer goods were already being paid for at black market currency rates in the months before the devaluation. But you never know in Ethiopia, it may still go higher if there is expectation of a general inflation in the horizon.
For the record, currency devaluation is one of the most dramatic measures of economic policy that a government may undertake. It generally distresses the populace. For these reasons government are always reluctant to devalue their currencies. In fact for many, it’s a measure of last resort.
Last… or first resort, the government of Ethiopia and its advisors (IMF, World Bank, and major donors) hope that by dropping the prices, farmers are going to produce more coffee, miners more gold, and flower growers more roses.
No matter… whether there is demand for the goods or not!!
Only economists, no other persons with common sense, would buy this argument.
Who then forces governments to devalue?
The international monetary institutions and large donors insist on devaluation whenever they see the country’s international payments or debt payment position is in “fundamental disequilibrium”, whether this disequilibrium is the result of outside or inside development.
How can devaluation help the country improve its international payments obligations?
First, the argument goes, by boosting export, second by reducing the trade deficits – as exports increase and imports decrease, trade deficits go down; and third by reducing the country’s internal debts. [Economics 101]
Yes, Ethiopia needs to boost its trade (or rather its capacity), reduce its deficit and, downsize its interest payments on its internal debt, but not through devaluation, but by engaging in a series of comprehensive political and economic efforts. Here are some ideas that are relevant to any country that want to avoid devaluations over the long run.
First, address the current cost of political uncertainty. With a host of political dissatisfaction hanging in the balance, it’s easy to see why firms might postpone making investment decisions. They need to see clarity in the political trajectory. They need to see whether this government is ready, and up to the task of reforming its political institutions and bureaucratic structures. A moment not to miss!
Second, take out the red tape, corruption and the ever increasing regulations and bureaucracy to encourage foreign and local investment. These measures do not require financing, and they could be implemented rapidly, and if done well, they could have an impact relatively quickly.
Third, find schemes to favor imported investment goods as opposed to imported consumers’ goods in an effort to stimulate investment in manufacturing, while also avoiding production that use relatively more capital and more imported components.
Fourth, encourage consumers to buy more home produced goods rather than imports, while supporting firms to become more competitive by providing tax relief for capital investment, training and consulting services.
Fifth, consider a reasonable liberalization of certain aspects of the economy, whereby imports and other international payments that were previously prohibited or subject to restrictions are allowed to take place under much less restraint than before the devaluation; and local banks should focus on lending for investing purposes not just for building construction.
Sixth, encourage and facilitate migration (not just of house maids, but of skilled professionals), and work towards integrating migration into the country’s development policies. Although at substantial social costs to the migrants and their families, migration and the resulting remittances lead to increased incomes and poverty reduction, improved health and educational outcomes, and promote economic development.
Seventh, go after all those who illegally move dollars abroad to buy apartments in Dubai or in Washington DC, pushing the value of the Birr lower.
Finally, take responsibility for the failure of current government economic policies and bring in a new team capable of leading the country forward; devaluation after all is a sign that the government’s policy had failed.