by: Peter Heinlein--special to SharonCobb.com from Ethiopia
Ethiopia has sharply devalued its currency - the birr - in a bid to boost economic growth. The move was welcomed by economists, though it may have the side effect of fueling inflation.
Ethiopia's Central Bank announced Wednesday that the birr has been devalued from roughly 13 ½ birr to the dollar to nearly 16 ½ birr, a one-day drop of about 17 percent. The rate was posted on the bank's website. Officials were not immediately available to comment.
Action Gets 'Thumbs Up' - With Some Reservations
The International Monetary Fund representative in Addis Ababa, Sukhwinder Singh Toor, welcomed the move, saying it would help to bolster the competitiveness of Ethiopia's struggling economy.
Analysts said the devaluation should improve the Horn of Africa nation's trade deficit. Figures for fiscal year 2010 show a $7 billion deficit, based on $8.7 billion in imports and $1.7 billion dollars in exports. The trade deficit comprises about 30 percent of Ethiopia's Gross Domestic Product of about $23 billion a year.
But Tewodros Mekonnen, a researcher in the Macroeconomic division of the Ethiopian Economics Association, said the devaluation may not have the desired effect immediately because imports are mostly essential goods, such a food and fuel, while exports are agricultural items.
"In order to reduce your trade deficit, your import and export needs to respond to the exchange rate devaluation, but at the moment imports are too essential to reduce it, so imports may not respond as much," said Mekonnen. "Also, exports may not respond as much because you cannot increase your agricultural exports just because you have the advantage of the exchange rate devaluation."
Tewodros said the hope is that the devaluation could spur domestic production of some of the essential items that currently must be imported.
He is among several analysts who say the downside of the devaluation is a possible uptick in inflation, which in July stood at 5.7 percent. It also could force the government to revise its estimated budget deficit, as more local currency will be needed to purchase necessary imports.
Exports and Growth
Ethiopia is Africa's biggest coffee exporter, and the world's fourth largest exporter of sesame.
Prime Minister Meles Zenawi says Ethiopia's economy has grown at a rate of 10 percent or more in each of the past seven years, though international agencies question the method of calculating the figure. Mr. Meles says, though, that even with double digit growth, the country must run just to stand still, because population growth in the country of 80 million people has been faster than economic growth.
A poverty index recently released by Oxford University and the United Nations ranked Ethiopia as the world's second poorest country, after Niger.