Ethiopia had been under a state-led economy in which the government had a tight control over the economy including currency exchanges.The national currency, Birr, has been depreciating since the government announced macroeconomic reform by scrapping its foreign exchange control to boost FDI, reduce debt and inflation.
What has happened in the aftermath of the announcement of the reforms was the continuous depreciation of the Birr, which has now hit over 40 percent. This has prompted concern. Both concerns and optimistic projections have been arisen from citizens, economists, investors and the business community as the central bank decided not to control the exchange rate.
Economists are also commenting that such a reform does not necessarily mean that the government would not intervene. "If it feels the exchange rate is perhaps too volatile,it can intervene in the markets," said Financial Risk Analyst, Patricia Rodrigues. It depends on where the Birr currency stands against the USD exchange rate either to buy or sell foreign currency.
To her, the market participants are better able to determine at what rate they should be exchanging on a kind of one-to-one basis. However, she stressed the immediate impact has been really to devalue the currency which grounds potentials for inflation to increase.
"The IMF coming out and saying they had agreed 3.5 or 3.9 billion USD support package to help the government cope with this rising inflation. Essentially, what it is intending to do is subsidize certain food and fuel imports for a little bit of time to allow the market to stabilize," Patricia Rodrigues said.
Fairfax Africa Fund Global Chairman and Invest Africa advisory board member Zemedeneh Negatu, on his part added that the reform has been on the dramatic change in policy regarding the floating exchange rates.
"And that is definitely a big policy change. It happened for the first time in 50 years," he said.
This is actually part of an overall economic transformation of policies that Ethiopian government has been implementing in the last four or five years. This should not be seen as an isolated event, Zemdeneh said, mentioning that the government has introduced homegrown economic reform with multiple pillars so as to enhancing manufacturing, agriculture, ICT and tourism among others.
Ethiopia has craved for economic transformation in the last 15 years and achieved a rapid development led by state-managed economic programs. The east African country has now the fifth largest economy in the continent in terms of agricultural production, GDP.
The Ethiopian economy has grown a lot from where it was about 10 billion USD twenty years ago. So, the baggage that came along with it was something the whole legacy policies needed to be changed and the incumbent was one of the main things, according to Zemedeneh.
"The opening up of the economy to private sector is also one of the long-awaited reforms supporting the growth," he said.
Ethiopia was among the first African countries to introduce telecom services 100 plus years ago. But it is serving nicely since the entrance of Safaricom four years ago - following the sector's liberalization. The same thing will happen in the banking industry as foreigners are now allowed to enter the Ethiopian market, he added.
One of important things about liberalizing the foreign exchange system is that it may help to lead to greater liquidity, Icap Africa CEO, Duncan Keil believed.
"It is incredibly important that the liquidity is freed up and sadly simply liberalizing foreign exchange does not guarantee more. Liquidity still operates unfortunately a huge trade deficit. And until those changes, the trade surplus is the worrying bit and the inflation caused by the liberalization is likely to see civil unrest as well."
Nigeria was the first to take such action and that was a very brave decision. It would have short-term pain and hopefully for long-term gain, he stated.
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"And it is the first step in Ethiopia towards liberalization. Then the banking sector needs to be liberal, and there needs to be the establishment of liquid capital markets. So, it is incredibly positive thing. It is a very exciting time for Africa's big economies though, there's a long way to go," he said.
Forecasting the future prospects, the big losers are the ones who are arbitrating the currency informally. The power of black market though was about double which was depriving the country of the foreign currency it deserves to get, said Zemedeneh.
One of the interesting things happening in the last two and three weeks since the announcement of the liberalization is that the country is now updating exchange rate via banks, which is vital to boost export and stimulate the economy. So, the loser will be the ones who are not adding any value to the economy, he remarked.
"The winners will be, for example, exporters those who operate in the official market and those who need ethics."
