10 October 2017

Ethiopia: Govt Devalues Currency, Raises Interest Rates

Photo: Addis Fortune
Orange prices have gone up by eight Birr a kilogramme.

In the midst of a Forex currency crisis, the National Bank of Ethiopia (NBE) has devalued Birr by 15pc and raised the interest rate by two percentage points to seven percent. The devaluation pegs the Ethiopian Birr at 26.91 to the dollar, up from 23.40 Br on the official market. It will be effective from tomorrow, October 11, 2017.

The Central Bank justifies the move as an effort to control the inflationary pressure and prop up export earnings. The export proceeds have been stagnant at around three billion dollars for the past three years, whereas inflationary pressure has been in the double-digits for the past two months, having reached 10.8pc in September 2017.

Yohannes Ayalew (PhD), vice governor and chief economist at the Central Bank, announced the adjustment today in a press conference where only the state media was invited to attend.

Seven years ago, the government had made a 17pc devaluation resulting in inflation that had reached as high as 40pc.

"Since investment return is high in Ethiopia, the devaluation won't cause an inflationary pressure and adversely affect import," said Yohannes.

For more than half a year, the official exchange rate stood at around 23 Br to the dollar, while black-market traders sold a dollar for nearly 29 Br.

The current devaluation surfaced almost 11 months after the World Bank (WB), in its fifth economic update, suggested the government devalue the currency to raise the country's competitiveness in the global arena. The recommendation, however, was rejected at the time by Yohannes, although the real effective exchange rate (REER) has appreciated in cumulative terms by 84pc since the nominal devaluation in October 2010.

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