Slashing import and cutting public expenditure according to experts are imminent short-term remedies to ease the acute shortage of the much-needed hard currency as National Bank of Ethiopia warned that the national reserve stands low.
Dr. Yeneger Dessie, the Bank’s Governor told MPs last week that while the government is trying to find various sources of hard currency, the country still faces severe national reserve shortage.
During his one year anniversary, Prime Minister Dr. Abiy Ahmed also said he spent his time searching for ways to limit the economic impact of hard currency shortage and external debt.
He stated that he succeeded to bring huge chunk of dollar in his one year tenure. However, the Governor’s shortage. “Let alone huge investments, we are even import dependent to supply textile companies with raw materials. Abiy’s administration has also cut forex debt which added to the problem.” For the economy to be pronounced normal, the National Bank has to have a deposit of a minimum of three months of hard currency reserves. Ethiopian economy generates forex by exporting coffee, sesame and other agricultural products, he adds.
But this was hampered by political crises and instability happing in the country over the last four years. One of the shortterm remedies is for the government to limit provision of currency, he adds saying, “the government needs to identify key sectors and provide them with the highly sought currency—basic commodities, pharmaceutical and others.” The country has seen sharp public investment decline. The government should have withdrawn its investment share gradually, he argues.
The Prime Minister has been able to turn commercial loans into concessional loans and extended repayment period. This is what Abiy should also be carrying on working to get the loan payment period extended, according to him. This, in fact, does not only rest on the shoulder of the top officials, diplomats working in others countries have the responsibility to help the process and mobilize diaspora to send more remittance via formal channels.
“Increasing remittance should be on the table. In fact, remittances stands as the biggest source of hard currency earning exceeding even export one. We need to push for generating more remittance and our diasporas also have to use formal channels of money transfer. “
Regarding the shortage of foreign currency, Ethiopia has been at high risk in many respects. As a traditional rule, any country should have enough reserve to pay for three to six months of imports and to have enough to cover the country’s debt payments and current account deficits for the next 12 months, says another Economist, Dr. Abdi Yuya Ahmad. Ethiopia’s reserve has recently fallen below these thresholds.
The increasing demand for foreign currency, the weak export basis, and the devaluation of commodity price in the global market are believed to have contributed to the problem, he says. The immediate solution to the problem is to think of the sources and take necessary actions to address them. Looking for debt at a favorable rate is the first way out in the short term. Restrictive public-sector policies, especially on completing ongoing projects and prudent budget execution are also useful to deal with the acute shortage of currency. Attracting FDI and increased formal inflow of remittance from the diaspora may also help ease the problem.
Most of the issues are related to structural problems which can only be dealt with in the long term, he adds. On the other hand, the country’s monetary policy is said to be rigid and problematic. Speaking to FBC recently Yared Hailemeskel, Investment advisor of the Prime Minister notes that As Ethiopia is the third diplomatic hub, there are many employees who earns their income in forex. But the monetary policy restricts the time of deposit only for 28 days. This forces the workers to deposit offshores. Dr. Eyob Tesfaye who is Macro economist also commented that the country’s rigid policy must be relaxed. “We need forex bureaus or currency shops. Also, we need to work on import substitution.”
“We cannot just ignore the black-market. Rather than trying to chase after the market, we should find ways to integrate it to formal channels and make it other legal sources of hard currency,” states Dr. Gutu. According to sources, the amount of foreign exchange reserves of a country is used as an indicator of the ability to repay foreign debts. Some experts relate the financial problem with institutions. The sector they argue falls short in terms of mobilizing resources, domestic savings and channeling them into highreturn investments.
Still, significant portion of rural communities do not have access to banking and other financial services. Poor infrastructural facilities, strong regulations are major hurdles affecting the sector. But again the sectors’ actual performance depends on the policy of the state and how much it incentivizes the sector. Eyesuswork Zafu is a development Economist and has long been critics of closed door financial policy. He told The Ethiopian Herald recently that there must be a paradigm shift to reform the financial sector. “The financial sector is lagging behind mainly due restrictions and lack of professionals.” In general, the financial sector is very weak and cannot be competitive enough at the international level,” he adds.
The country maintains close door policy when it comes to financial sector. This despite some protection to local investments prevents the sector to evolve and improve. The sector is steered by strong government intervention which favors some groups and discriminate others. The country needs to gradually move to market-led economy from the development state paradigm that allows stringent regulation by the government, as to Eyesuswork.
The Ethiopian Herald April 5/2019
BY DESTA GEBREHIWOT
