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Costs associated with direct control of almost any
market invariably exceed society’s gains. This is an
economic truism that is increasingly appreciated by
many developing nations. Freeing markets from the
reins of cumbersome state management seems elusive
to a government that claims the need for an extended
transition period into capitalism, which appears
indefinite. The closed currency account is no
different as evidenced in the recent crackdown on
black (parallel) market traders.
In a rather telling, if not slightly humorous
180-degree turn on market definition, police claimed
that these merchants of cash, who were quite obvious
to the point of being a hassle to a pedestrian
around the “Ambassador” area, were distorting the
foreign exchange market. Unfortunately, the opposite
is true and it is rather the government that
nominally controls currency trades that is
attempting to artificially prop up the Birr, a
dangerous game to play considering the free and fast
nature of the huge international financial sector
and Ethiopia’s future global integration plans,
including membership in the World Trade Organisation
(WTO).
Both the growing discrepancy between official
exchange rates posted by the National Bank of
Ethiopia (NBE), who is charged with the unenviable
task of regulating the Birr in domestically and
internationally inflationary times, and the
unofficial street rates as well as the astounding
lack of discreetness appeared to be an overwhelming
flood ready to break the controlling dam. In the
end, it was the traders who were chosen to be
eliminated over the more consequential, though
eventually prudent, release of official currency
control.
For now, NBE, with executive branch support
demonstrated in the busts of more than 26 trading
sites, has the upper-hand over small-time traders
whose collective currency holdings cannot match the
Bank’s vaults and thus will not be able to
orchestrate the severe fluctuations that reap havoc
on markets but bring profits to currency traders
with the muscle to challenge the central banks of
smaller economies. But there will come a time when
NBE will have to worry about its leverage with
memories of crises the world over that have rendered
central banks from Mexico to the smaller Asian
Tigers at the mercy of investors.
Unfortunately, the arrests of the less-distorting
traders on the streets compared to those at official
forex windows, signal that the country is far from
willing to explore the free market currency trading
options. Even in the face of official-black market
discrepancies that were reaching 10pc with the only
preventative measure of taking advantage of the room
for profiteering being heavy controls on issuing
dollars, the answer for this government is to
tighten control, not reconsider overly centralised
policies.
The reasons for depreciation of the Birr appear to
be textbook economics. With soaring import demand on
the back of economic growth creating larger
disposable incomes and increasing need for foreign
produced supply inputs continuously overstepping
exports of price variant primary products such as
coffee, flowers and oil seeds, the Birr is destined
to stand weak against the international currencies.
As demand for dollars, and especially euros, rises
with fuel and fertiliser needs and prices
skyrocketing by almost 22pc, the Birr is not a hot
commodity. Rather the 1.09 billion Br merchandise
trade deficit in the fourth quarter of last fiscal
year does not bode well for official controls. But
the cement importers who were allegedly taking
advantage of the system are the ones suffering and
not the central bank which should be striving to
devise the creative strategies to contend with the
market factors. There are numerous reasons to be
pulling for a new approach to dealing with exchange
rates other than the unsustainable closed account.
They range from the unexplored and nuanced
mechanisms for creating market-based solutions to
exchange rate fluctuations to more pressing and less
forgiving pulls from the global economy.
WTO accession, a process that would increase trade
by eliminating barriers to international exchange,
is one of a number of coming developments that
merits new thinking on how to cope with the fallout
from loss of economic autonomy. No doubt, officials
partaking in the World Bank meeting on the subject
at the end of the month will have this on their
agenda given recent local developments.
Other options are simply to increase the flow of
foreign currency into the country. This view was
recently advocated by Dilip Ratha, Sanket Mohapatra,
and Sonia Plaza in a working paper that advocates
news ways to finance development in Sub-Saharan
Africa. While the research takes a holistic approach
to development, its findings also have implications
for exchange rate pressures.
The economists claim that reducing costs of
remittance transfers by half would result in a 2.5
billion dollar increase in volumes entering the
region. Here in Ethiopia, lowering the incentive to
seek often costly or time-consuming ways to get
around official transfers might have a positive
impact on flows.
Other policy prescriptions such as issuing Diaspora
bonds, which have brought in 25 billion dollars in
recent decades to Israel, or securitizing future
remittances are incentive based ideas that would
both aid in attracting unofficial inflows and help
with currency issues currently plaguing the country.
What is certain is that strong-arm control of
markets is not the long-term answer. As is usually
the case with underground markets, any crackdown
will only change the structure of operations and not
eradicate the problem. It is time the government
looks to sustainable market options to solve
exchange rate issues.
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