National Bank of Ethiopia (NBE) has devalued Birr by 15 per cent and made interest rate policy adjustments as of today.
Foreign exchange earnings from export could not finance the import demand of the manufacturing sector, said Dr Yohannes Ayalew, Vice-Governor and Chief Economist at NBE during a press conference held yesterday.
Investors have also struggled to gain foreign currency permits to import raw materials and capital goods, according to him.
As to him, to achieve the lofty goals set in the Second Growth and Transformation Plan, the country needs significant amount of foreign currency. Hence, the government is expected to come up with strategies to mobilize and raise the required foreign currency demand.
Hence, the devaluation measure was taken with the view to boost exports, shrink trade deficit, and reduce sovereign debt burdens, he noted.
The Chief Economist added that devaluation of the birr might also have negative consequences, mentioning inflation as a major case in point.
The devaluation measures would just add to price hike expectations and the already existing inflation rates, apart from making imports expensive, he added.
Directly or indirectly, currency levels affect a number of key economic variables. As he indicated, the devaluation will make the inputs needed to finalize the ongoing hydro-dams more expensive, hence raising their overall construction cost.
In addition, NBE has also raised banks' savings account interest rate and minimum balance from 5 to 7 per cent starting from today. Different international monetary institutions such as the World Bank in 2014 has been saying that the birr was overvalued and suggested the government to devalue its currency to increase in export earnings and economic growth.