12 August 2018

Ethiopia: Exchange Rate and the Economy

Photo: Addis Standard
Ethiopian birr.

On September 2017 the government took action to appreciate the currency rate of birr by 15 percent to encourage exporters there by address the looming currency crunch that the country suffered at the moment.

Recently too, the government after the coming of Prime Minister Dr Abiy Ahmed, has taken various actions that are likely to encourage the country's foreign currency earnings. The first is the encouragement of Ethiopian diaspora to contribute a dollar perday for their nation which has gained due support. Secondly the government has also given a chance to those who have illegally hoarded foreign currency to deposit their holding to any commercial banks without any precondition. This has resulted in a large amount of foreign currency to be back to the legal transaction.

The availability of foreign currency in large amount is likely to decrease the rate of exchange. When many people are likely to benefit from the decrease as the local currency becomes strong, those like exporters may find their income decreasing when their revenue is translated in local currency.

Hence how does the government reconcile the differences?

Foreign exchange rate is one of the most important means through which a country's relative level of economic growth is determined. The exchange rate is a rate at which one country's currency is converted to another.

It may fluctuate daily with the changing market forces of supply and demand of currencies from one country to another. A country foreign exchange rate provides a new window to its economic stability.

If the import is less than the export it is beneficial for the counter's economy. That is why the government encourages the export rather than that of import. If the import and export things are not compatible, the method that we are going to use is balance of payments method in order to make stable economy. The government can control this foreign exchange rate by adopting its own policy.

Talking to the Ethiopian herald, Assistant Professor of Economics at Addis Ababa university Birhanu Denu, said still now we can import many things from abroad starting from industrial material to that of food even the export are encouraged. If we can export many products the income that obtained from the export increases the economy of the country.

The government encourages this export to use a domestic products rather than importing the external products. Now in Ethiopia there was an increment of foreign exchange rate daily and if the supply is greater than that of the demand it may cause deflation.

In addition to this the daily foreign exchange rate have its own advantage in reducing the black market. And if the black market is reduced the government can use money for different purposes and the economy of the country is also stabilized.

Dr. Birhanu explained that regarding the doubt with the incremental of daily exchange rate , if the daily exchange rate is increased and the investors are also beneficial from this daily exchange rates.

According to Dr. Berhanu it will have no side effect as the amount of the price of the product imported from abroad reduces at the same time with the decrease of the exchange rate.

He added that, the reduction of the dollar have its own advantage for them rather than side effect. He states that, the investors can import many things from abroad for their industry like that of different machinery, spare parts and the like. They import this products by the lowest prices at the same time.

Now a days no one industry can be worked without those machines and it is mandatory for the investors to import those products. These raw materials can be imported from abroad at the same time by the lowest prices.

The professor notifies that, they can import this products with less prices and this can make them beneficial. The other thing is encouraging foreign direct investment to increase the income of the country. This foreign direct investment can be depend on many things it may be the political situation of the counters.

This foreign currency can be affected by many things like that of inflation rates. Change in market inflation cause change in currency exchange rate. In addition to this the political situation of the country also affects the foreign exchange rate. This means if there is stable political situation in the country the ability of attracting the investor is good.

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