Ethiopia: Reclaiming the Fading Purchasing Power of the Birr

(File photo).

Ever since the birr was devalued once again in September, 2018, its exchange rate against the U.S. dollar started to soar. From just over 27 birr in banks, the exchange rate of the birr slowly crept up to hit 37 birr for a dollar in the black market over the past few weeks. Following the devaluation, the price of a number of goods and services shot up by a considerable margin making life even harder for those who earn an honest day's living.

Especially, the announcement that there has been a shortage of foreign exchange in the country fueled the rapid rise of the exchange rate. However, Prime Minister Abiy Ahmed's (Ph.D.) warning that those who have kept large sums of foreign exchange better go to the bank in time as the country is bracing for a large influx of foreign exchange has been instrumental in lowering that figure to match those of banks. In so doing, the PM has effectively destroyed the black market and flooded banks with stashed foreign currency. The gap between the current bank exchange rate and that of the black market has been reduced to as little as 10 cents per dollar from 10 birr per dollar a week ago.

It is also important to note that measures to crackdown on the illegal exchange of currency should be taken sustainably as such schemes exacerbate the government's lack of foreign currency. By offering better price for exchange than banks do, the black market draws more foreign currency to itself attracting money that could, otherwise, have ended up in banks. With the government repeatedly stating about the shortage of foreign currency, the control on black markets should have been more pronounced. Social services and national plans should not be detracted as the black market siphons foreign currency away.

The effects of such a change have already become visible as the prices of some goods have considerably gone down. There has, for instance, been a twenty birr per unit decrease in the price of reinforcement iron bars. The implications of such a price decrease to the construction sector would be immense especially if these conditions are to be sustained over the course of a sensible length of time.

The Prime Minister's call for Ethiopians living abroad to use banks whenever they send money to their relatives has also been instrumental in driving foreign currency into the formal economy.

Considering the popularity and optimism associated with PM Abiy, it is no wonder that his call to for people to contribute to the development of the country through the use of formal monetary channels has been widely accepted. Some groups of Ethiopian living abroad officially boycotted sending money into Ethiopia all together in opposition to the lack of political freedom. However, these groups have officially changed their stand to encourage Ethiopians to send money into the country using formal channels.

In addition to these bold measures being taken under the leadership of the new PM, the presence of a more peaceful, unified and hopeful scenario for the country contributes to the appreciation of the value of the birr. Since PM Abiy came to power over three months ago, the internal peace of the country as well as the regional peace of the horn of Africa has improved visibly.

The revamped Ethio-Eritrean relations that broke the two decades of tense military standoff are the most notable of the major steps towards improved regional peace. However, moves towards economic and social integration in addition to political solidarity among countries of the horn have become the hallmark of PM Abiy's stay in power up to now.

There have been genuine efforts by the new administration to widen the political platform and a number of opposition political parties based abroad have decided to move back home. Armed groups have officially put down their weapons and pursued the peaceful path following the new PM's call to work together and compete for popular votes peacefully. There have also been measures taken to raise the protection of political rights as imprisoned journalists, politicians, bloggers and activists have been released. Freedoms of expression and of the press have also seen their sunny days as media once banned to operate in the country have now been officially called in.

These internal and regional positive activities by the new administration have been welcomed by the international community. There has been tremendous support pouring in from major western powers, Arabian countries, Asian countries and beyond. As a result, Ethiopia has been granted a very favorable and progressive image among the international community. This sense of optimism is expected to be followed by a large influx of investment as the conditions briefed above make the country more conducive for investment that it ever was. We are already witnessing the first batches of huge investments as foreign investors have declared their intention to build an industrial city of 72.5Km2 in Ethiopia.

Such huge influxes of investments are expected to flood the market with foreign currency, helping keep the exchange rate relatively low. Therefore, the positive developments in the country also serve as mechanisms to improve the purchasing power of the birr over the long term.

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