Ethiopia devalues its currency to support export
24 October 2017

To increase imports, the National Bank of Ethiopia devalued the Ethiopian birr by 15%, effective 11 October. This decision resulted in a net increase of 3.45 birr on the previous exchange rate of 23 birr per dollar.

The measure was announced by Vice Governor and Head Economist Yohannes Ayalew, who excluded repercussions on inflation, stating that: “Since investment return is high in Ethiopia, the devaluation won’t cause an inflationary pressure and adversely affect import”. To avoid an impact on inflation – which rose to 10.8% year-on-year in September compared to 10.4% in August – the National Bank increased interests rates on deposits from 5% to 7%.

The devaluation takes place eleven months after the World Bank urged the government to devaluate the country’s currency to increase its competitiveness in the global arena. According to the World Bank, depreciation of 10% would have resulted in a 5% increase on exports and push economic growth by 10%. At the time, Ethiopia decided not to heed the World Bank’s advice, advice which the IMF concurred with.

The last devaluation measure by the Ethiopian government was back in September 2010, when the birr was lowered by almost 20%, although the currency – which has been freely exchanged on the foreign exchange market since 1992 – had already been depreciated on other occasions.

Yohannes Ayalew stated that, “The devaluation was made to prop up exports, which have stagnated the last five years owing to the birr’s strong value against major currencies”. Exports in the Horn of Africa – the largest coffee exporter in the continent – grew by 24.1% between 1996 and 2004, but total revenue from exports has slowed over the past few years due to lower prices of raw materials, such as coffee, oilseeds, leather and gold.

The country’s banks will make earnings on their foreign exchange reserves, but tax laws require them to hand over 75% of the profits to the government. If the devaluation measure does not have repercussions on inflation, it will nonetheless negatively impact foreign debt.

The central government made its move on the exchange rate to reach its goal for the current financial year (which began on 9 July) and increase earnings in the agricultural, mining and services sectors. Ethiopia’s economic progress was praised by international financial bodies such as the World Bank and the IMF. Ethiopia has one of the fastest growing economies in Africa, with the IMF predicting a 9% GDP increase in 2016–2017.

This expansion is fueled primarily by public spending. The government has invested heavily in dams for hydroelectric energy, new highways, and an electrified railway that connects the country to the Port of Djibouti. According to the IMF, it will need to attract more private-sector investment to keep up this growth.