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Tyler Cowen (PhD), a prominent professor and economist in the US suggested several steps Ethiopia could take to bring in more hard currency. He does not think devaluing the Birr will alleviate the hard currency shortage.
During his private visit to the country the professor lauded the economic achievements that the country registered in the past but he went over some economic concerns.
“I am probably more optimistic about Ethiopia than any other African nation. He said that it has registered high growth in the past decade. What I is see the asset here human capital I think it is very strong,” Tyler, who published an opinion early this week entitled ‘Ethiopia Already Is the ‘China of Africa’’ on the Bloomberg website after his Ethiopia visit, said to reporters during a presser at the US embassy.
Regarding with the latest hard currency shortage that the country faces he said that as long as the price is wrong supply and demand will not be equal.
Ethiopia must deal with Addis becoming a mess, he said. He pointed out that 25 years ago a lot of Indian cities were in a sense like Addis is now. So stopping Addis from becoming a non manageable wreck would be one of the biggest challenges.
As long as the price is wrong supply and demand will not be equal. “Since the interest rate remains somewhere between 30 to 33 percent different from the market rate, the problem will always be there,” he said. He said the government might be forced to free up the interest rates in the future and when that happens, it would likely be painful for at least the first two to three years. “In the long term it is better for the economy after two –three years of intense pain,” he added.
Restoring normal open capital markets at a consistent pace is another recommendation he made.
He thinks brining in foreign banks will not solve the foreign exchange problem. However he does see some benefit:
“So long as the price is wrong, supply and demand will not be equal. So allowing in foreign banks is probably good idea because you have secure financial institutions and they will give you better innovation, better networks for FDI, that is all good at the same time as long as the price is set to high for the value of the things you goanna have the capital imbalance,” he explained.
He said that devaluation would not give any extra support for exports since the input would be imported with the highest price. “You may sell more but at the same time importing inputs will be very expensive,” he said.
Tyler is a professor at George Mason University and also director of the Mercatus Centre. His book the Great Stagnation: How America Ate the Low-Hanging Fruit of Modern History, Got Sick and Will (Eventually) Feel Better was a New York Times best–seller.