The government of Ethiopia recently made a landslide policy reform in its macro economy which focuses on foreign currency administration, according to the policy statement. The policy reform is amid the reforms the government has made since its assumption of power six years ago which is within the framework of the Home-Grown Economic Reform Program but it is the major one in touching various sectors of the nation’s economy.
The economic reforms implemented over the past six years have aimed to address longstanding main inherited economic structural problems include debt burden, inflation, unemployment, slow economic structural change, low sector productivity and competitiveness, poor performance of development projects, and resource management.
Following the government’s decision regarding the overall macroeconomic reform program, the National Bank of Ethiopia has announced that it has revised the country’s foreign exchange rate. What will be the benefit of this reform, which has been implemented since last Monday, in terms of ensuring comprehensive economic development and benefiting different sections of the society?
According to the document of the National Bank of Ethiopia, although the foreign exchange system that existed until now was aimed at ensuring a stable foreign exchange rate and low inflation, it has gradually become one of the main reasons for the expansion of the black market, high inflation, extensive smuggling of precious metals, and foreign currency being out of the banking system and fleeing the country.
All of this has led to a chronic shortage of foreign exchange, allowing a few illegal entities and brokers to benefit instead of productive sectors. As a result, many businesses and investors have been victimized. It has eroded the effectiveness of the policies and efforts put in place to expand export trade and factory products, attract foreign investment and increase the country’s foreign exchange reserves. In this sense, the reform of the foreign exchange management system is not easy but necessary.
In the explanation given by the Governor of the National Bank of Ethiopia, Mamo Mihretu; it is a historic change in the foreign exchange management system that has been implemented since last Monday. He also mentioned that this will move Ethiopia to a competitive foreign exchange system based on the market and will improve the macroeconomic instability and distortions that have been prevalent in the economy for a long time.
According to Mamo’s explanation, the amendment will be implemented in accordance with the new foreign exchange guidelines. This directive amends several existing foreign exchange management directives. It has brought together various foreign exchange management guidelines that were scattered.
He further explained the main changes and contents of the new foreign exchange management system reform. The reform will shift to a market system where the foreign exchange management system is determined by the interactions between banks and their customers. In this, the role of the National Bank of Ethiopia will be focused on ensuring a stable and healthy foreign exchange trading system.
In the past, especially in the last 30 years, the scattered and inconsistent foreign exchange management, rules and regulations have been revised, refined, adapted and crosschecked to be included under one set of guidelines. The new uniform guide is easily accessible to everyone. From now on, there will be no obligation to transfer foreign currency to the National Bank of Ethiopia.
Accordingly, exporters and commercial banks can keep the foreign currency they earn for themselves. This is believed to significantly improve the supply of foreign exchange to the private sector. Exporters keep 40% to 50% of their foreign exchange earnings, and in the process, they will keep their foreign exchange market completely for themselves.
The document also stated that the foreign exchange reform will have a great contribution in attracting foreign investors, increasing foreign direct investment, and making the trade system compatible with neighboring and peer countries.
Currently, Ethiopia is one of the largest African economies and many developing countries with a foreign exchange control system and a foreign exchange fence. “Although Ethiopia is a favorable and interesting country for investment in many ways due to its population, skilled workforce, reasonable and competitive resources (manpower, land), strengthened air transport and improved logistics, energy supply, natural resources and minerals, all these opportunities are ineffective due to the difficult and strict foreign exchange management system. It did not go as expected. Therefore, the establishment of a better foreign exchange management system will help to remove the old practices that have been a barrier to foreign investors and promote foreign direct investment,” the information of the National Bank of Ethiopia explains.
On the other hand, it is mentioned that the reform of foreign exchange will help to avoid many business practices that have been encouraging informality and illegality in the economy. The current foreign exchange management framework does not encourage foreign exchange to come in through banks and causes foreign exchange earning companies or individuals to flee abroad. It pointed out that most of the business community and remittance customers are buying and selling in the black market due to the spread of the informal market in foreign exchange. It is stated that the new foreign exchange management reform will take this market situation into consideration and will encourage entry into a competitive, transparent and convenient modern trading system by avoiding such informal practices.
In general, it has been shown that the foreign exchange reform will help to overcome the shortage of foreign exchange, enhance the competitiveness of exports, attract foreign direct investment and strengthen many other reform measures to support the private sector.
It has been stated that extensive and adequate preparations have been made for the success of the policy. In order to ease the pressure on the people, especially those with low incomes, the government has decided to temporarily subsidize the price of some basic goods imported from abroad. Financial assistance will be provided to those whose real income has eroded due to high inflation in recent years; it has also been stated that foreign debt relief assistance is available to support the government’s social spending and to ensure that the large amount of money spent on foreign debt payments is clearly offset by other expenses.
Public policy and economics expert, Kostantinos Berhetesfa (PhD) said; “It is an issue that we have been talking about 27 years ago so that the amendment should be done. This policy is the following for developed countries and African countries such as Kenya, Tanzania, and Uganda that are close to Ethiopia.” He mentioned that this policy reform will create a big step forward for the country’s economy.
As explained by Kostantinos (PhD); when a person starts trading, many investors can come into the country because of his relationship with the capital market and foreign banks. This will increase the investment potential of the country.
Noting that the amendment is of great importance in preventing the black market; in connection with this, he pointed out that the government should stop the smuggling activity, especially money and gold that are taken out of the country illegally. Apart from that, he advised that it should focus on peace and stability so that investors can enter widely. If this is the case, he indicated that the reform will be of great benefit to Ethiopia’s economy.
The economist stated that the amendment is significant in terms of ensuring comprehensive economic development and benefiting different sections of the society. It can promote the economy in a way that the people of Ethiopia can use it.
Ethiopia has not had such a uniform financial policy yet, and the National Bank has been serving as a treasury. There were only a few who were benefiting from the existing policies. “Currently, the foreign currency transaction will stabilize. In the future, the capital market will be widely mobilized. Foreign banks also enter,” he noted.
“When the government is able to control illegal trade, exports will grow. The cost-income trade balance will be proportional. As exports grow, the population will be able to engage in higher-level employment and earn a better income. This will increase the country’s economy,” he explained.
According to National Bank forecasts, as a result of the reforms, Ethiopia’s economy will grow by an average of 8% in the next four years. Inflation will be close to 10%; tax revenue will reach 11% of GDP, government debt will decrease to 35% of GDP; the value of export and import trade will increase to 20 billion Dollars; foreign direct investment will increase to 8 billion Dollars; global reserves will exceed 10 billion Dollars (enough to cover 3.3 months of commodity prices). These projections are indicative of the level of economic transition that may occur as a result of the above-mentioned reforms in the coming years.
BY BACHA ZEWDIE
THE ETHIOPIAN HERALD WEDNESDAY 31 JULY 2024
