Recently, Governor of the National Bank of Ethiopia (NBE), Mamo Mihretu announced that the currency exchange regime which was run by fixed exchange rate earlier is changed in to demand and supply or market led. The measure is unprecedented and takes the nation to immerse to market economy.
As to Mamo, the measure can be taken as a way out to resolve the existing macro-economic defects such as shortage of hard currency, debt service, inflation, and illegal financial transaction. It also enhances the role of the private sector in the economy.
In fact, temporarily, the new exchange regime may bring some challenges and to overcome the negative consequences, some vital commodities such as fuel, fertilizer, edible oil, and industrial inputs will be subsidized by the government and the salary of low income public servants will be increased.
To increase the supply of basic commodities such as edible oil, child milk and others; investors are allowed to import through Franco valuate without opening of letter of credit in Banks. To manage the parallel market, private foreign currency exchange offices will be operational.
The National Bank’s directive allows Ethiopians to open bank account in hard currency and deposit and use it as they want. Banks are also allowed to lend hard currency from foreign Banks. Exporters are also allowed to deposit the hard currency they earn in their own account.
Bereket Fisehatsion is Chief Executive Officer of the Government Investment Administration Department at the Ministry of Plan and Development. As to him, to assess the positive outcome of the newly introduced exchange rate regime, looking the past macro-economic situation is essential. The macro economy had passed through various anomalies and disorder due to many factors. It also had faced structural problems and to resolve the crises, economic reforms were implemented. The home grown economic reform and the 10 years economic development perspective plans can be mentioned as example in this regard. Within these programs, there were sub programs which were prepared to alleviate the shortcomings of production and productivity and improving investment climate.
Among the very objectives of the economic reform was reducing the government debt pressure through fiscal reform. In addition to increasing the nation’s currency reserve capacity, making effective the government expenditure accomplishment; making the profit making institutions owned by government efficient and transforming the government finance administration is essential.
As to him, the home grown economic reform comprised vast issues and most of them are implemented and positive outcomes are registered. The only package which was not implemented was adjusting the foreign currency exchange rate. In the past, the shortage of hard currency inhibited manufacturing industries to import spare parts and inputs. As a result, they were forced to purchase hard currency from the parallel market which again exacerbates the illegal trade. Exporters also were forced to export their agricultural and mining products to the neighboring countries through illegal channel because of unfair price for their products in the local market and the practice critically harmed the nation’s foreign currency earning capacity.
The home grown economic reform underlined the value of the expansion of the manufacturing sector because it regards the sector as key sector to create employment for thousands, attract foreign and local investments, substitute import, boost export, create link with agriculture and ultimately to play its role for attaining structural change. But as mentioned above, due to shortage of hard currency, the sector was forced to produce below its average capacity. Hence, the newly introduced exchange rate regime is expected to bring relief to the foreign currency crunch.
Reflecting his view on the role of the market based exchange rate in reducing illegal trade to the neighboring countries, Bereket said that in the market economy the price of foreign currency has immense value and the price should be set by the formal finance system and if it is deviated from such channel, the market will be distorted and manipulated by un identified interest groups which again harms the nation’s economy.
In Ethiopia, due to the rampant corruption, it was unable to control and put illegal traders into account. Therefore, strengthening the legal institutions is essential to make the law functional.
He further said that in the past, the currency exchange regime did not encourage manufacturing sectors so that traders were forced to find their way to the neighboring countries to conduct their export trade.
The hard currency price set by the National Bank was not guided by the principle of market and this again restricted the role of the private sector in the economy. The newly introduced exchange rate regime, however, helps the price of the money based on the market and when this happens, the economy gets a chance to compete with other countries’ economy. Manufacturers also obtain better chance to export their products and tap other countries’ markets. The exchange of foreign currencies through demand and supply in banks reduces the role of parallel market in the economy and attracts investors to purchase Dollars from Banks formally and encourages the flourishing of formal and modern market system.
As to Bereket, the new exchange rate regime has numerous values to the nation as well as the people and among others, it helps to reduce government debt burden, regulate the foreign currency distribution to be in a justified manner, to utilize the currency in efficient productive sectors, to earn more hard currency, to keep up trade balance and promotes production and productivity. In the middle and long term, it helps economic competitiveness. It also serves to substitute imported commodities by producing locally. It serves to pull more foreign investment and create job opportunities for thousands and stabilize the economy.
As to him, the new currency exchange mechanism considers social groups that would be affected and utilize various approaches to reach them and in this regard, consolidating productive safety net program can be mentioned. In addition, the government will make supervision works on greedy businessmen who set artificial price to maximize their ill gained profit.
He further said that the anxiety witnessed by some segments of the society due to the new development is far beyond the reality. In Ethiopia, about 80% of the population is residing in the rural part of the country engage in sedentary farming and mostly consume agricultural products produced by their own and their access to imported goods is minimal. Hence, the impact of the new exchange rate on the rural population is insignificant. It is clear that the urban population might suffer from the brunt of the new currency exchange regime and to protect the urban poor, the government will allocate huge amount of budget to subsidize these segments of the society.
According to Bereket, Ethiopia is one of the emerging economies in Africa with abundant natural resources including excessive numbers of productive labor force. Its modern air transport system, mines and tourism sector are conducive for attracting foreign investment but it suffers from shortage of hard currency, foreign debt and unemployment. As a result, it was unable to exploit it resources and relieve from abject poverty. Therefore, the newly introduced exchange rate determined by market forces is expected to bring remedy to the old age economic havocs.
The newly introduced exchange rate system further strengthens the recently introduced home grown economic reform in terms of stimulating the private sector to play a leading role, to open the economy to foreign investors and others. The opening of sectors that have been prohibited to foreign investors such as telecom, logistics, Bank, capital market, wholesale and retail market put fertile ground for the exchange rate to be governed by demand and supply.
As mentioned above, the Ethiopian economy is one of the emerging economies in Africa and it has huge potential to register more development. The already constructed infrastructure such as roads, energy generation plants, clean water and industrial parks have played pivotal role to create employment and boost the economy but the exchange rate system which has been existed for more than half a century was a bottleneck for advancing the economy rapidly and hampered the economy to move sluggish. Therefore, copping the new opportunity to attain economic progress is essential and to that end, stakeholders should play their own part.
BY ABEBE WOLDEGIORGIS
THE ETHIOPIAN HERALD THURSDAY 8 AUGUST 2024
