By William Davison, Bloomberg: Ethiopia’s central bank expects exports and domestic manufacturing to improve after it devalued the birr by 17 percent this week, said Alemayehu Kebede, a spokesman for the National Bank of Ethiopia.
On Sept. 1, the bank adjusted the exchange rate to 16.351 birr per dollar from 13.628, the third time it has devalued the currency in the past 14 months.
Studies conducted by the central bank found that Ethiopian exports were struggling to compete in international markets, Alemayehu said in a phone interview from Addis Ababa, the capital, today. The central bank acted to “encourage them, to help them find a market,” he said.
Last month, Ethiopian Prime Minister Meles Zenawi announced a five-year growth program aimed at doubling the country’s gross domestic product to more than $50 billion. The average growth rate over that period is expected to be 14.9 percent.
The devaluation marks an effort by the government to experiment with a “deliberately undervalued exchange rate and to pursue a more aggressive strategy of import substitution,” Access Capital Research, an Addis Ababa-based company, said in a note on its website yesterday.
“Both these efforts can be seen as being in line with the main objectives” of the growth plan, it said.
The devaluation may also boost Ethiopia’s foreign-exchange reserves and reduce imports, Access said.
Ethiopia needs to raise its reserves to 3 months of import cover from 2.3 months to cushion its economy from external shocks, the International Monetary Fund said in a June report. For that, it needs to devalue the exchange rate by 10 percent, the IMF said. Imports in the fiscal year ended July 7 totalled more than $2 billion for the first time, according to Trade and Industry Ministry data.
Another consequence of the devaluation may be the inflation rate climbing to as high as 10 percent, Access said in an e- mailed statement on Sept. 1.
Ethiopian inflation peaked at more than 60 percent in mid- 2008, according to the IMF. The rate stood at 5.7 percent in July, the Central Statistical Agency said on Aug. 16.
While there will “definitely” be price increases for importers and consumers, this will be off-set by increased export revenue and domestic production, Alemayehu said.
Ethiopia is Africa’s biggest producer of coffee, which accounts for about a third of the nation’s exports. The country also ships flowers, pulses, gold and khat, a narcotic leaf.