The National Bank of Ethiopia (NBE) announced a devaluation of the country’s currency, the birr by 15% effective Wednesday, October 11, 2017. Along with the devaluation which is the first since 2010, interest rates on deposits have been pushed up by 2%, it will now stand at 7%. This is in a bid to cope with the serious foreign currency crunch it has faced and in attempt to cover a billion dollar loan payment due this years, according to information obtained by ESAT. The devaluation pegs the Birr at 26.91 to the dollar, up from 23.40 Br on the official market.
In modern monetary policy, a devaluation is an official lowering of the value of a country’s currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency or currency basket. In other words,there is a decrease in Ethiopia’s value with respect to other currencies. Income from Ethiopia’s top products has dropped in recent years because of low global commodities prices, contributing to a shortage of foreign exchange that has hampered the economy.
So why does it matter? Whether deliberate or as a result of market climate, this devaluation will reduce the price of Ethiopia’s domestic output. This has the potential to benefit the economy by helping to increase its export volume. Conversely, import volumes will become restrained as the price of foreign-produced goods and services increases dramatically.The Horn of Africa country is the continent’s biggest coffee exporter but its total export revenue has been falling short of targets for the last few years owing to weaker commodity prices.
The government has invested heavily in dams for hydroelectric power, new highways and an electrified railway linking the landlocked nation to a port in neighbouring Djibouti.The IMF has said Ethiopia needs to attract more private sector investment to maintain growth. But Addis Ababa has in the past tended to brush off such advice and said it would keep charge of key sectors.
Will this be an added advantage to Ethiopia now that it has become a low-cost destination?