An acute foreign exchange shortage continues to
disrupt the Ethiopian economy since last summer. The
phenomenal - though short-lived - business shutdown
by East African Bottling Company that bottles the
most popular beverage, Coca Cola, is a clear
demonstration of the extent of the problem.
Amidst a foreign currency shortfall, many actors are
suggesting different recommendations that they
believe would alleviate the currency shortage,
thereby protecting the economy from a troublesome
forex crunch. One economic measure suggested that
attracted my attention was the one prescribed by
Kenichi Ohashi, World Bank’s director for Ethiopia
The Director commends the administration’s measure
in depreciating the value of the Birr against the
dollar and suggests for more of it to come.
Interestingly, the Prime Minister uttered this
measure during a recent press conference, further
saying that it was the same recommendation advised
by the IMF. From this, I would conclude that his
administration is currently seriously contemplating
the recommendations for further depreciation of the
However, I would argue that this measure of
devaluing the local currency is anachronistic, thus
ineffective in bringing the intended result -
helping the exporters remain competitive in the
global market. And perhaps, as a result, the harm it
may cause to the economy could be painful.
The measure is believed to discourage imports and
encourage exports, with the result being the
maximizing of foreign currency inflow and putting a
hold on the outflow, as textbooks clearly state.
believe instead that there is a very insignificant
chance that the private sector imports would be
decreased as a result of the discouraging impact of
the devaluation of the local currency, especially in
the short run. There are insufficient domestic
producers to substitute consumer imports with a view
to driving importers and imported products out of
Importers will continue importing, despite the high
cost of doing so. And the consumer has limited
choices, thus simply is forced to accept whatever is
on offer, notwithstanding high prices. That is
actually the scenario on the ground currently. This
is not to mention the fact that stores are running
out of stock and shelves are increasingly getting
empty. Whatever is available, businesses are raising
prices fully aware that the next container of their
goods could take a very long to arrive here. This,
in a way, is inflationary.
predict that there would be no significant reduction
in the market share of imports. The frequently heard
marketing gimmick - “sole importer” - is a signal of
how the import market is dominated by a few such
that consumers have no power to influence prices.
Besides, the state imports, which include huge
machineries for various infrastructures,
fertilizers, wheat and oil, constitute a significant
share of total imports. The administration cannot
use the exchange rate as an instrument to discourage
its own imports. That would be self defeating.
If the administration wants to limit imports, it
should simply reduce its spending. In the absence of
that, the overall impact of the devaluation of the
local currency on imports is insignificant.
It may have the required impact in the long run. But
this has to be accompanied by a radical shift in
policy and strategy, probably a reverting to the
1960s import substitution strategy.
The same is true of exports.
An increase in exports is more of a structural issue
than a one-time devaluation of the Birr. It is of a
capacity to produce volume the expertise of
But I believe depreciating the local currency tells
a different story. As result of the devaluation of
the Birr, the money supply would significantly rise
just because of accounting reasons. Therefore, we
may see the measure as a sure recipe for inflation.
would rather see the administration do what it has
been doing over the past year, months or weeks.
Instead of pondering on outdated and ideology-driven
economic policy measures suggested by market
fundamentalists such as the IMF, it is time to
capitalize on strategic thinking. Corresponding
measures could include seemingly random tactics that
may sound shocking to market fundamentalists.
The measures taken so far by the administration are
all indications that the government is trying to
solve the problems in a strategic manner. These
measures include: a government strategy-oriented
lending policy pursued by state owned banks;
conducting orientations on these polices and
strategies to state bank executives; the central
bank’s atypical - from the point of view of free
market - address to existing private banks, which
urges the latter to be cautious with lending; a
return to allocation of foreign currency based on
priorities and currently applied by state owned
banks; and a belated decision to let the Coca Cola
bottler use imports on credit.
However, strategic thinking requires energy,
research, decisiveness, and above all, very
brilliant individual strategic thinkers with the
capacity to provide judgment in order to ensure a
better outcome. The administration should make sure
that all are in full supply.
One of the reasons behind China’s ability to wither
and survive the financial and economic storm that
haunted the developed world is the tactics and
strategies taken by the Chinese Communist Party (CCP)
that leads the country. I see a similarity between
the CCP and the EPRDF in this regard. Nevertheless,
the future will tell us how successful the EPRDF is
in all its approaches and strategies in dealing with
the existing macroeconomic challenges.