Devaluation of Ethiopian birr impacts economy

Ethiopia's economic landscape has been facing some turbulent times as the Ethiopian birr continues to depreciate at an alarming rate. Since mid-2018, the currency has experienced an annual depreciation of more than 20 per cent, raising concerns about the state of the economy. To shed light on the factors contributing to this situation and the implications for the country, CNBC Africa's Tabitha Muthoni interviewed Gashaw Hailu Desani, Manager of Business Intelligence and Analyst at Awash Bank. Desani highlighted that various factors have led to the weakening of the birr, including political instability, declining export earnings, and a reduction in foreign direct investment. These combined factors have created a challenging environment for the Ethiopian economy, affecting both imports and the foreign exchange market. One of the major impacts of the devaluation of the birr is on imports, with more than 85% of Ethiopia's imports consisting of necessary goods such as fuel, fertilizers, food, and cereals. These essential commodities have an inelastic demand, meaning that consumers cannot easily reduce their consumption despite price increases due to currency depreciation. Consequently, this has led to an inflation spiral, further straining the economy. Additionally, the disparity between the official and black market exchange rates poses significant risks to Ethiopia's economy. The widening gap, with the black market rate exceeding the official rate by almost 100%, signifies a severe shortage of foreign currency. This imbalance not only encourages illegal activities and corruption but also undermines the effectiveness of monetary policy, potentially leading to a loss of faith in the national currency and a decline in foreign direct investment. In response to the foreign exchange shortage, Desani suggested that Ethiopia should focus on enhancing the supply side of the economy. This includes increasing export earnings through product diversification and promoting import substitution to reduce reliance on foreign goods. While devaluation may offer a short-term solution, sustained economic stability requires broader structural reforms to boost the country's foreign currency generation capacity. When discussing the potential impact of a weaker birr on exports, Desani noted that the price elasticity of Ethiopia's export commodities, primarily agricultural products like coffee, oilseeds, and gold, limits the benefits of currency devaluation. As international market prices largely determine these goods' value, the country has little control over export prices. Furthermore, logistical challenges and bureaucratic hurdles hinder the export process, highlighting the need for reforms in infrastructure and ease of doing business to enhance export growth. Looking towards long-term economic growth prospects, Desani emphasized the importance of investing in key sectors such as agriculture and manufacturing. By increasing agricultural productivity and adding value to raw export materials, Ethiopia can boost its export revenues and reduce dependency on foreign imports. Furthermore, prioritizing light manufacturing could enhance domestic production capacity and stimulate economic growth. Despite the challenges posed by the depreciation of the Ethiopian birr, there are opportunities for the country to implement strategic reforms and structural changes to ensure a more stable and robust economy in the future.