ABEBE WOLDEGIORGIS
These days, the shortage of foreign currency has become one of the common characteristics of Ethiopia’s macro-economy. It is common to hear the complaints of importers and exporters as they couldn’t access hard currency to conduct their day to day businesses.
The huge negative trade balance clearly shows the country’s poor position in generating hard currency. Yet, the hard currency available is also distributed in illegal/black markets.
To overcome the problem, the government has been taking various measures. One of the long term solutions in this regard is boosting the export performance in terms of volume, quality and diversity.
The other is to encourage the Ethiopians overseas and persons of Ethiopian origin to use formal channels to send remittance. According to the official report, currently, the nation annually earns billions of Dollars through remittance.
Some argue that the fixed exchange rate that is set by the National Bank of Ethiopia (NBE) is one of the major factors that discouraged Ethiopians oversea to use formal channels. As to commentators, sometimes the market that is controlled by the NBE allows for the overvaluation of the birr against the USD forcing people to go to the black market.
This results in a shortage of hard currency in the formal market. Therefore, they suggest that to manage the problem introducing the managed-floating exchange rate where the price is determined by demand and supply is crucial.
Dr Teklu Alemu, an economist, is an advocate of a floating exchange rate. During a recent panel discussion organized by ETV, he said to minimize the government’s intervention in fixing the exchange rate; the possible alternative is to level the playing field by introducing a foreign exchange market which is governed by the principle of demand and supply.
In fact, dollarization of the economy will never be a preferred approach in Ethiopia as the current level of economic development does not permit it.
But assigning people with high professional integrity to determine the country’s monetary and fiscal policy is vital to reduce government intervention.
In this regard, managed floating exchange rates used as a tool for the government to restore or improve the price of goods, competitiveness of exporters in global markets and respond to an external economic shock affecting the economy.
Tigist Getachew is a manager of East African Trading Company. As to her, In the Ethiopian context, it is impossible to establish a national bank that is free of government intervention as the government is a dominant player in the economy and the private sector is in its infancy level and does not play a defined role in the economy.
For the last 15 years, the interest rate of birr for depositors was five percent and this testimony to the fact that the government has a dominant role. To up the role of the private sector in the economy, first public-private partnership must be developed and the government should give up its huge involvement in the retail and small business.
If such liberalization measures are taken step by step in the coming ten years, it will create a favorable room for the private sector to play an uplifted role in the economy.
As to Dr. Teklu, an independent bank means a central bank that is not involved in partisanship. The objectives of establishing the establishment of national bank is to support the private sector and the economy at large.
True, in many countries, National governments establish national banks except in the US where the Central Bank is unique and established by private banks in order to avoid partisanship.
The national bank’s independence is manifested by its engagement in stabilizing the macroeconomy, managing inflation, and regulating the money supply in the market. The national bank should not be manipulated by politicians to serve their greedy capitalist ambitions. It should not be subjected to the influence of the powerful men to get the order to print money.
The major task expected from the national bank is to raise the capacity of the economy to create jobs for citizens and balance the demand and supply of the money in circulation using various mechanisms.
In addition, it can also utilize interest rate to achieve certain economic gains. It should also work only based on expertise decision-making by avoiding the government’s unnecessary intervention.
On the other hand, Tigist expressed her concern that if the exchange rate determined by the demand and supply, it will have significant harm on the flourishing manufacturing sectors.
To produce export standard shirt, an investor must import various input and according to experts, a shirt produced for export gets 50 percent of the production input via imports. Hence, determining the exchange rate via the market only might discourage imports and force investors to involve more in export (of agricultural commodities).
This will discourage emerging manufacturers and in the absence of strong value chain and with less productivity rate, producing internationally competent goods is unthinkable. Investors who come here to produce export goods might also withdraw their capital due to the scarcity of currency used for importing inputs.
Getachew Teklemariam is also an economist. As to him, when the exchange rate is floating, the major risk will be inflation which affects the livelihood of the low-income segment of society.
The price of the imported items also rises. People who have more local currency will be advantageous to purchase dollar from the formal market. But in the long run, when the economy grows, the risk will be minimized.
However, as to him, independence is not simply attained. It is a culture and has to do with building strong institutions. The National Bank as institution has its own established culture and it has its own impact on the working environment. Yet, the job to reduce the volatility of exchange rate should begin today.
As to Getachew, to reach that level where the exchange rate is determined by demand and supply, it is vital to give a lot of emphasis on improving productivity. Farmers should meet their basic needs and encouraged to produce more. Investors also should focus less on what they gain and more on what kind of services they provide to customers to be able successful in the long-run.
He further said that crafting long term strategy is helpful to achieve structural change.
The nation must not only be competent in the world market but it has to also substitute imports as much as possible. Unless the country halts the importation of basic needs such as edible oil and wheat, it would be impossible to have a stable exchange rate or introduce a floating exchange rate.
The Ethiopian Herald December 31/2020
