Cyber Ethiopia

On Devaluation : How to remain poor By Kebour Ghenna

Kibur-genaBy Kebour Ghenna
October 16,2017

I want to write one or two words about the surprise devaluation of the Birr.
But first… Last week a dear reader from the government information office wrote to tell me how wrong I was to argue, that the Ethiopian ethnic based federal system has failed.

Let me just say again, in many parts of Oromia people seem to be at the brink of something monumental: our problems, challenges, and discontents keep growing by the day. We don’t want to see them. We don’t want to understand them. And this is all at our own risk!

It’s difficult for a man to see something when his career depends on not seeing it.
Enough about federalism, devaluation of the Birr, is our subject of the day.
The government last week announced a solution to our export problem: a devaluation of the Birr by 15%!

Just few days after the announcement of the devaluation, a PhD economist invited on one of the FM stations, repeatedly explained to us that devaluation is necessary to boost exports, especially if the economy is stagnating (who said it is in Ethiopia?)

No one is more persuasive than economists when they try to predict the outcome of some human interactions. Yet, these ‘scientists’ are consistently laughably wrong. One wonders how is it possible to prescribe devaluation when we’re told, to the point of being bored, Ethiopia’s economy continues to be the most productive and prosperous? It doesn’t make sense. Does it?

In a day the average Ethiopian got poorer with little prospect of silver linings anytime soon. By devaluating the Birr the government has basically reduced citizens’ wages and savings, not by reducing the amount they get every month, but by making the Birr less valuable.

Will this devaluation make Ethiopia richer?… Or poorer?

We will come to that in just a minute. This situation is a classic one. First government causes problems and then offers solutions that are known to make things worse.

The economist on the radio answered the question in the usual economic jargon, by saying that the exports of the country will improve when its currency undergoes devaluation … companies have to pay higher prices for the commodities they import from other countries…the mambo jumbo claptrap.

As always, we don’t understand the language of economists!

Instead, our PhD economist should have simply said that last week’s devaluation of a currency reduced the wealth and savings of you and me. He should have explained to the public what happened to its salary and savings with the devaluation. Tell the public that a person, say, with a monthly salary of 1000 Birr, and a savings of Birr 5000, when hit by a 15% devaluation, his or her salary becomes Birr 850, and savings become 4,250 Birr. Over night! Without anyone doing anything! The same applies to the state’s foreign denominated debt which will see sharp upward change in its value!

Will this devaluation make you richer?… Or poorer?

For the benefit of everyone, the economic theory says that devaluation of the Birr will cause the following to happen:

• The price of Ethiopian exports e.g. gold (21%), coffee (19%), plus the others (e.g. live animals, oilseeds, flowers and khat) will be lower in foreign currencies. This will increase the competitiveness of these exports and should cause an increase in demand for Ethiopian exports.
• The price of imported goods into Ethiopia will increase. This will reduce spending on imports and instead we will be more likely to buy domestic goods.
• The increase in export over import should cause an increase in aggregate demand (AD), economic growth and cause a reduction in unemployment (assuming demand is relatively elastic). Higher AD is also likely to cause higher Real GDP and inflation.
• The increased competitiveness should cause an improvement in the current account on the balance of payments.

Again, that’s the theory!

In reality devaluation depends on countries’ economic circumstances.

• The higher costs of imported raw material and capital goods associated with exchange rate depreciation may increase marginal costs and lead to higher prices of domestically produced goods.
• In a severely depressed global economy (e.g. 2008-13), a devaluation may be insufficient to restore economic growth.
• As for the few manufacturing plants that have began exporting, their owners benefit, but their workers loose. Plus cheaper prices may have less incentive to cut costs and become more efficient. Therefore over time, costs may increase.
• In any case, with devaluation you need deeper pocket to adjust your economy and clean up your act.

Remember 2017? The devaluation was 17% then, and yet the country had only a weak recovery, export has been fluctuating up and down (mostly down), with some cost push inflation and a large current account deficit. It seems the devaluation of the Birr in 2017 did little to help Ethiopia’s economy.

Imagine over 30% devaluation within seven years and still merely muddling along…this is not good! So why is it that repeated devaluations fail to lift our economy? The radio economist kept quiet on this matter. But here are some reasons:
• Demand for exports and imports have basically remained unchanged (or inelastic in economics jargon). Ethiopia continued to import items (popcorn, Black Label, cereals etc) that did less to encourage the growth of industries.
• Weak global growth, combined with excessive regulations, red tape and corruption, also did not help;
• Very little lending offered to small and medium enterprises. Therefore, the devaluation was insufficient to compensate for the fall in other components of aggregate demands.

Anyway, devaluation is a decline in a country’s standard of living. Traditionally, it’s a tool used by a desperate government with a poor economic policy. No nation ever devalued its way to greatness or even prosperity. Rather, the devaluation of one’s currency has generally been fatal, as everyone quickly learnt these past days with the devaluation of the Birr… our money felt like a ball that quickly lost air or go flat.

Short URL: http://cyberethiopia.com/2013/?p=1794

Posted by on Oct 17 2017. Filed under News, Views and Opinions. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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