Ethiopia devalued its currency, the birr, by 17 percent against the dollar, the third such move in the past 14 months, according to the National Bank of Ethiopia.
The exchange rate was quoted at 16.351 per dollar today compared with 13.628 yesterday, according to the website of the Addis Ababa-based central bank. It was trading at 11.381 on July 10 last year.
The devaluation will crimp imports and make it easier to boost foreign currency reserves. Ethiopia needs to raise its reserves to 3 months of import cover from 2.3 months to cushion its economy from external shocks, a June report from the International Monetary Fund said.
There is a “need for a 10 percentage point real exchange rate depreciation” in order to achieve that goal, the IMF said in the report.
Ethiopia’s trade deficit was expected to grow to $7 billion in the fiscal year to July 7 from $6.3 billion the year before, according to IMF figures.
To contact the reporter on this story: Jason McLure in Accra on [email protected].
SEATTLE – Ethiopia’s latest currency devaluation is a sign of an economic decline and a dismal political environment, Seid Hassan, professor of economics at Murray State University told Ethiomedia by phone on Wednesday.
The measure, which is actually long overdue given that the economy has been weakening for a long time, is also to stem the huge trade deficit at over $4 billion on the one hand and earn foreign currency on the other, Professor Hassan said.
Ethiopian goods would be cheaper and imported items more expensive, indicating that importers would be most affected by the latest currency devaluation. Since devaluation would also raise inflation, Ethiopian workers would be greatly affected unless the government counters the effects by raising their salaries, he said.
“In theory, the devaluation is designed to mitigate the effects of trade deficit but could be hard to achieve in reality given the complex nature of the economic factors, Hassan said.
“The bottomline for the currency devaluation is to secure hard currency,” the economist said, citing possible pressures from the IMF and a desperate measure the government should take to live up to the promises it made over what it called the five-year development plan.
Prime Minister Meles Zenawi says the country’s economy has been growing at over 10 percent every year for the last seven years but economists dismiss his talk as baseless.
