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post Comments: Birr Devaluation

September 5th, 2010

Filed under: Economy — Lissan Magazine @ 15:30

This comments are taken from chrisblattman.com. The comments are based on an article titled “Why you should pay attention to the Ethiopian devaluation” from the 2nd of September 2010. We are only presenting here the comment from two of the readers. Please click on the above link to read the full article.

The article begins…
“Yesterday Ethiopians received a September surprise when the central bank devalued the currency by 20 percent.”

The comment by Almaz goes:
Currency devaluation on the basis of a certain economic policy is something every nation does occasionally, more so amongst the developed nations than developing ones with the exception of China. Some 20 years ago Canada did it to stimulate the economy to pull it out of the early 1990s severe recession. Canada devalued the currency by 45% at some point. Then again, Canada is economically integrated with the US, over 80% is exported to the United States, and for that reason the devaluation was understandable. The timing also did have something to do with, a new trade regime was on its way being implemented (NAFTA) US did not mind for the border town States benefited from the exchange rate advantage of importing Canadian goods and products to present it for the voracious appetite of US consumers.

Although the depreciation would take only a year and half but raising it back to the level it was prior to the recession, it would take over seven years. Because it would be very risky for the confidence of the Canadian economy to maintain that low exchange rate after the economy got its wing to fly, foreign investors cannot get a good return for their investment if that low exchange rate was maintained, so instead of attracting few more investors the currency devaluing nation can lose many more investors. So, one has to show confidence on their economy by maintaining strength on their currency to reflect a good management and command.

Given the above example its not a bad idea for Ethiopia to devalue BIRR, however the trade deficit Ethiopia has is far greater to compensate by the export increase it will have no matter how large the export is, because Ethiopia is an 80 million nation with trade deficit is into billions. So devaluing the currency may encourage one time (short term) investors to come and take advantage but they will leave once that advantage runs its course. Those who buy real estate would benefit from the exchange rate advantage it will give them, but all others things will rise immediately after. As illustrated above, Ethiopia is an import economy nation. In the long term the country could lose its ability to maintain that same juice stimulant for an extended period of time knowing the way I know Ethiopia.

China on the other hand can manipulate its currency as much as it wants for however long it desires for it has a huge reserve, essentially driving the world currency exchange rate. Alluding to the fact, if one controls the US currency, one has the world in their pocket. Ethiopia does not have excessive reserve like China does, as a matter of fact Ethiopia is running a yearly deficit economy, which means it cannot do what China does and come out unscathed. It may help it for a one time currency collection by giving the labor of the citizens to the foreign investor accumulating the extra 20% and using that extra juice the one time foreign investor can increase the margin of profit by a 20%. However, that’s where it stops. The nation would have to devalue its currency further down in order to get another stimulant juice, the question then becomes where does the devaluing stop.

People who are running a responsible big financial company like Access Capitals may have been shaken over this sudden move, and based on the website it looks like that is exactly what happened. The author of that report tried politely to calm people down that this is a one time move and will not move another dime till June 2011. Well, I am most certain that such a rapid transition would mean the government does not have a clear command over the economy, hence the possibility for further BIRR decline is inevitable, it may not come soon but at some point the move will be repeated. The authorities may be testing the waters, see how far they can go without arousing a mass protest.

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The comment from M.D.M. goes:
I am not an economist, I am just a businessman (an importer), so my analysis could be wrong. But I don’t blame the government, what better means is there to narrow the trade deficit? But Can anybody tell me how they came up with the 20% figure? It is a nice round figure and it looks like somebody just guessed it. My second question is how can Ethiopia compare itself with China and think of import substitution? China virtually manufactures everything while Ethiopia produces almost nothing. So don’t you think the damage outweighs the benefits and the substitution has to come before such big devaluation? Although I think the government has good intentions and is doing everything it can, such violent up and downs in the economy shows the future doesn’t look good for us here.

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source: chrisblattman.com

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