Shortage of hard currency has long been one of the major economic hurdles in Ethiopia. It has been a daunting challenge facing the growing but heavily importdependent economy. The recent reports of foreign currency crunch are perpetuation of the country’s vicious cycle of foreign currency shortage mainly due to mismatch between import and export, low remittance performance, devaluation of commodity price in the global market and others.
Forex is a blood vessel for non oil economy in boosting investment. The problem has been taking its toll in the economy over the last decade. Large chunk of investments have been carried out by public sector with the major sources of capital being grant and loan. This trend has put the country into server debt distress to which Prime Minister Abiy Ahmed is also trying to ease by extending payment periods converting commercial loans into concessional laws.
On Wednesday China agreed the cancellation of interest free loans matured till end of 2018 as Abiy met Chinese President Xi Jinping. This week also Prime Minister Abiy Ahmed met with the privatization advisory council to evaluate updates on the privatization process. The independent council was set up several months ago as an oversight body to provide expert inputs as state owned enterprises open up to private investments. This is partially is aimed at generating hard currency .
During his one year anniversary,Prime Minister Dr. Abiy Ahmed said he spent his time searching for ways to limit the economic impact of hard currency shortage and external debt. He stated he succeeded to bring huge chunk of dollar in his one year tenure. However, the Governor’s recent report reveals the need to prescribe immediate remedies to somehow fill the dwindling coffer of hard currency. Slashing import and cutting public expenditure according to expert’s 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.
While the government is trying to find various sources of hard currency, the country still faces severe national reserve shortage.The fact that Ethiopia’s backlog reported to be covering less than three time , raises red flag with huge economic uncertainty The Prime Minister has been able to turn in to concessional loan and extend payment.
This is what Abiy should also be carrying on working to get the loan payment period extended. Diplomats working in others country have the responseblity to help the process and mobilize diaspora to send more remittance via formal channel. “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.”, said Dr. Gutu Tesso, an economist and Oromiya Economists Association President. The fact that the country heavily relies on import also aggravates the forex shortage. “Let alone huge investments, we are even import dependent to supply textile companies with raw materials. Abiy’s administration has also cut loan and credit. For the economy to be pronounced normal, the national bank has to have a deposit of a minimum of three month hard currency reserves. Ethiopian economy generates forex by exporting coffee, sesame and other agricultural products.
But this was hampered by political crises and instability happing in the country over the last four years. One of the short term remedy is for the government to limit provision of currency, he added saying “ the government needs to identify key sectors and provide them with the highly sought currency this may include to import basic commodities, pharmaceutical and others.” The country has seen sharp public investment decrease.
The government should have withdrawn its investment share gradually. 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. AbdiYuya 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. 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. On the other hand, the country’s monetary policy is said to be regid 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. The country’s rigid policy must be relaxed, we need forex bureaus or currency shops, why do the black market established , macro economy expert the business as usual does not work, international price could not be an excuse, it is fragmented, it should come together , import substitution, commented Dr. Eyob Tesfaye who is Macro economist “We cannot just ignore the blackmarket.
Rather than trying to chase after the market, we should find ways to integrate it to formal channels and make it another legal sources of hard currency’’ stated Dr. Gutu. According to sources the amount of foreign exchange reserves that a country has is used as an indicator of the ability to repay foreign debts. Some experts relates the financial problem with institutions.
The sector they argue falls short in terms of mobilizing resources, domestic savings and channeling them into high- return 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.
The Ethiopian herald April26/2019
BY DESTA GEBREHIWOT
