When it comes to Ethiopia, the economic
weakness is reflected by several of the resource gaps: the savings-investment gap, the balance of
payments gap which in 2009 escalated, total exports and imports amounting $1.657 billion and
$7.093 billion, respectively, according to the CIA World Fact book. Ethiopia is also afflicted by other
gaps such as a continuous budgetary gap, a skilled human resource gap, a significant agricultural
(food security) gap, a dire foreign exchange gap, technology gap and most importantly a good
governance gap1.
By just looking at the solvency issue, that is, the balance of payments and
budgetary balance gaps and the alarming foreign exchange shortages, one is led to believe that the
birr is overvalued and devaluation is necessary. When I wrote the popular article titled as the “The
Causes of the Soaring Ethiopian Inflation Rate,” a few years ago and suggested that the birr was
overvalued, some of my readers were perplexed by such an expression, informing me that I was
wrong. They did so partly because they thought I was agreeing with the government that devaluing
the birr would serve as a panacea for the structural problems that the Ethiopian economy was facing
and partly because they thought the theoretical possibilities were applicable to Ethiopia. All that I
was saying was this: using standard economic reasoning and rationales of devaluation, the fact that
there is a parallel market (black market) with the birr buying less dollars/euros means that the birr
was overvalued.
The fact that the government has been facing foreign exchange shortages and is
unable to meet the lowest required foreign exchange reserves (which is supposed to be not less than a
three-month import coverage, but the actual coverage at times being less than six weeks of import
coverage) and the fact that the IMF has been warning the government that it would face financial
difficulties implies that the birr could collapse, sooner or later. Moreover, the fact that even some
domestic firms were suspending their operations and unable to import the necessary intermediate
inputs from overseas due to the lack of foreign exchange also indicate a balance of payments
disequilibrium (that is, the exchange rate between the birr and other currencies has become
untenable). It also means that, with disequilibrium in the exchange rate in existence, the government
will be unable to carry on its new 5-year “Growth and Transformation Plan.”
It is for these already
existing realities and inherent weaknesses why I argued the birr was overvalued long ago. I also
believed that were it not for the continuous influx of donor assets (estimated to be $3 billion in 2009)
and remittances (the National Bank of Ethiopia reporting total remittances just for the first two
quarters of 2009 being $1798.8 million), the value of the birr would have been much lower than what
it was then and what it is now as well.
