Ethiopia’s Economic growth myth and currency devaluation




Ethiopia’s Economic growth myth and currency devaluation

What the TPLF government is trying to tell us is that its GDP grew by 11% (10.9 to be exact  ) over the last 12 months 10 of which was under the terrible State of emergency. No economy under a state of emergency grows by 11% anywhere. Infact, it should shrink over the previous year because a state of emergency restricts normal economic activity. If we break down all the GDP components, the equation is as follows.

Growth Domestic Product(GDP)= C + G + I + NX
C = Consuption
G = Government expenditure
I = Aggregate investment
NX = net export ( Export – import)

Consumption is the aggregate household expenditure on domestic products. Increase in consuption means that every household has more income to spend adjusted for inflation. For example, if the net income of a houshold was 100,000 birr last year and the inflation rate was 10% this yea, its purchasing power is reduced by 10% to 90, 000 birr. Therefore, to say that consumption has increased this year, the household’s income must increase by more than 11%. To say that consumption increased by 11%, the household income must increase by more than 22%. In an economy where the majority of income comes agriculture, that translates into 22% production increase. Similarly, salaried employees must have earned 22% more.

G

As many economists pointed out, the wayyane government did not make much of investment except in the military. No new roads or public housing were built in 2009. In fact crumbled roads remian out of order.

I

Investment entails both individual and capital. We can say that neither exists to speak especally in 2009.

NX is obtained by subtarcting the value of the imported goods from that of all exported goods and services. We all know that Ethiopia has always been a net importer. That manes that this value is negative.

More evidence that the Ethiopian economy shrunk in the year 2009.
The qusetion that a lot of people have been asking is that the fact that the govrenment annonuced a currency devaluation by 15% versus the green back a day after it announced an almost 11% GDP growth.

There are many reasons that a country may decide to devaluate its currency. One is to become competitive globally. Devaluing a currency makes country’s goods more affordable. This monetary policy is undertaken by net exporters. It has negative consequences for countries like Ethiopia because it makes imported goods more expensive.

Normally, if the economy does well, the currency will increase its value because there will be less of it in circulation due to increased investment(I) and savings. If the conutry is a net exporter, the govenment may decide to print more money to decrease its value provided that the currency floats against other currencies. If the currency is pegged against another currency such as the U.S dollar, the government may devalue it against that currency.

The Etihopian gov’t pegged the birr against the dollar but the reason that it decided to devalue the birr one day after it had announced an 11% economic growth is different from these legitimate economic policies.

The real reason is that the country is facing a very severe dollar shortage. The foreign donations that is a big portion of its GDP, the coffee, khat, hyde, and oilseed products, sugar, hydro power, livestock are major sources of the hard currency. However, curruption and the so-called millenium dam consume the majority of the dollar and thus the shortage.

” Ethiopia’s foreign currency supply available for importers and travellers alike is increasingly facing chronic shortages, claims an importer engaged in trading of household appliances from Asian countries, while opting to speak to Fortune on conditions of anonymity. As the country’s foreign exchange provision plummets into a whirlpool, the parallel or black market for hard foreign currency (which has become a rare commodity), is thriving in the country”

By devaluing the currency the TPLF gov’t hopes to accomplish two things:

1. Weaken the black market
2. Make banks an attractive alternative to importers and travellers

However, the move is very detrimental for the importers for two reasons:

1. It will make the dollar more expensive and cause even further shortage and

2. It will make foreign goods even more expensive. This will also increase the import duty on the goods. It does not stop there because importers will pass the extra cost to their customers who in turn pass it to the end consumers making living even more expensive than it is.

Knowing all this why did the gov’t decide to devalue the currency? This is not the first time, but this time considering the political and ecomonic turmoil, the decision shows that it is under heavy pressure and is looking for a temporary relief.

Via: Ahmad Idris