An Ethiopian financial expert says:
There are two implications of this devaluation.
1- It makes the country’s exports relatively less expensive for foreigners — a win for Foreigners.
2- It makes foreign products relatively more expensive for domestic consumers — a lose for Ethiopians. This will have immense detrimental impact on the general population. It is the same as taking a 20% immediate pay cut for any fixed income earner. Inflation is going to skyrocket. Prices of imported goods will soon be about double. Prices of domestic products (including agricultural) will also increase as the government is encouraged to export more. Interest rates will consequently rise to control inflation which, intern, will result in slower economic growth.
(Reuters) — The Ethiopian birr was devalued by 16.7 percent on Wednesday, according to exchange rates published on the central bank’s website.
The birr was quoted by the National Bank of Ethiopia at a weighted average of 16.3514 against the dollar compared with 13.6284 on Tuesday. A central bank official confirmed the new rate but was not authorised to make further comment.
Last month, the government unveiled an ambitious five-year economic plan which targets average annual economic growth of 14.9 percent over the period and aims to end the Horn of Africa nation’s dependence on food aid… Read more.
— Reuters
28 thoughts on “Birr lost 16 percent of its value over night”
Woyane’s proposal for hunger free 5year incrediblw and ambitious development plan with no positive prospect is right now manifasted in this paradoxical effect on our monetary asset.
But telling lies is a norm not a disgrace in Woyannes. So they would ever come up with justification that still Ethiopian currency is better than others compared to Kenya, India, bla bla bla… forgeting the Derg era in which 1 dollar was against 2.5 Ethiopian birr to be exchange.
They are really destroying our country in every aspect.
GUYS WALK UP NOW NOT LATER.
DOWN WITH wOYANE
Ambasel
Ambasel,
Did you say walk up? Up where? Heaven? or do you want to say “WAKE UP”.
The Economist you have quoted have said:…
2- It makes foreign products relatively more expensive for domestic consumers — a lose for Ethiopians.
The above is only true if Ethiopian can not survive without imports and no local comparable items are found in the market.
Otherwise, the move helps the nation save its foreign currency and help local producers to increase production. In that sense it would be considered a wise move.
The end result of all this will be the average Ethiopians will be competing with foreigners and with the Ethiopians of the Diaspora when purchasing their necessities, such as, enjera and kolo.
Foreigners will not be buying teff and enjera so no competition there. However, if the Diaspora Ethiopians buy more enjera and kolo, they will deprive their fellow Ethiopians and family members of these necessities.
So, my advice to the Ethiopians of the Diaspora is not to buy more enjera and kolo from Ethiopia more than we used to do before so that we do not compete with our fellow Ethiopians and family members in Ethiopia. If we do that, Woyane will not make money and then will ease its economic policy in favor of those Ethiopians at home.
Even if I am not sure about the long-term implication of this action by the Ethiopian Government, I was surprised by the one sided interpretation of your financial expert.
It reminds me the saying “Amarigna endabejus tebejalesh” .
He is right it make exports cheaper and imports more expensive but not sure to benefit foreigners (any one who lives outside including us) or to encourage local manufacturers…
What can I say my heart bleeds for the workers in Ethiopia l just hope woyanne imcrease their salaries when he
devaluate the money because this means increase in cost on everything
I think it should be de-evaluated even lower. Between 25-30 would be the ideal benchmark now. It has been valued rediculously high for decades. It can sustain a vicious bite to currency traders depending which one they are holding in their bags. This can make some folks filthy rich and some others busted and broke overnight.
Berero what are you trying to say? you know better English than Ambasel?… even though you knew what he meant to say? It is sad that you want to split hair when we have a huge problem in our community.
As I come to read this website so frequently, I have come to realize this is the web for losers. They are completely illiterate and do not have even the slightest knowledge of politics nor economics.
I see only opposition that have emanated from hatred, not for a slightest cause of change nor an improvement in the livelihood of the people home. Do you care about the economic prospect of the country or you are simply opposing and opposing like hell. Do you after all read to know, understand and to develop skills in interpreting opinions and so on and on.
Please, if we are wishing to change the prospect of the country let start by thoughtfully analyzing the problems and do not ever wish other to die for any cause we like to see.
Herds of pigs,
1. Eritrean money was Birr
2. Ethiopia impotes more than export , therefore, Ethiopians pay more Birr for imported items, which are everything
3. Ethiopian workers earning buys less imported items
4. Ethiopia imports basic need items, those items will become expensive
5. Ethiopians are dependant on imported energy, Ethiopians will pay more Birr for imported energy
6. School needs, building needs, war items are mostly imported, their cost increases
The main argument for the devaluation is the impact it has on export & Import.
In theory, it will increase exports of goods and services (importers of Ethiopian products pay less dollar to the item) and reduces imports by making imported items expensive (an importer of foreign items to Ethiopia pays more money to the item).
But the reality is a country like Ethiopia has to import a large number of factors of production which are not available domestically. At the same time, with the existing ill designed investment policies and corruption, the pace to investment and locally produce currently imported item will be so slow.
This will throw the balance of payment way off the cliff and will put the country into heavy foreign debts. Above all, the price of goods and services to the local consumer will go to the sky.
What most of the proponents of such move are unable to understand is that: Response of the export supply and import demand functions to devaluation. These functions are inelastic in the Ethiopian case. That means exports will not increase following devaluation and import will not be discouraged following devaluation as we are highly dependent on imports and the domestic economy is not in a position to produce the necessary goods. SO what the expert said above is what econ 101 in general and open economy macroeconomics in particular tells us. But the condition for a devaluation to be successful as I said depends on how elastic or import demand and export supply functions. I hope Elias your expert know about the Marshal-Lerner condition.
The Marshall–Lerner condition has been cited as a technical reason why a reduction in value of a nation’s currency need not immediately improve its balance of payments.[1] The condition states that, for a currency devaluation to have a positive impact on trade balance, the sum of price elasticity of exports and imports (in absolute value) must be greater than 1. The principle is named after economists Alfred Marshall and Abba Lerner.
As a devaluation of the exchange rate means a reduction in the price of exports, quantity demanded for these will increase. At the same time, price of imports will rise and their quantity demanded will diminish.
The net effect on the trade balance will depend on price elasticities. If goods exported are elastic to price, their quantity demanded will increase proportionately more than the decrease in price, and total export revenue will increase. Similarly, if goods imported are elastic, total import expenditure will decrease. Both will improve the trade balance.
So the government’s move should be evaluated on this notion. I suggest policies should focus more on improving supply rigidities in the domestic economy as well as improving institutional reforms before we go for devaluation in a country where supply responses to change in prices are minimal or insignificant.
Devaluation
Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged.
In common modern usage, it specifically implies an official lowering of the value of a country’s currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. In contrast, depreciation is used for the unofficial decrease in the exchange rate in a floating exchange rate system. The opposite of devaluation is called revaluation.
Depreciation and devaluation are sometimes incorrectly used interchangeably, but they always refer to values in terms of other currencies. Inflation, on the other hand, refers to the value of the currency in goods and services (related to its purchasing power). Altering the face value of a currency without reducing its exchange rate is a redenomination, not a devaluation or revaluation.Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged.
In common modern usage, it specifically implies an official lowering of the value of a country’s currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. In contrast, depreciation is used for the unofficial decrease in the exchange rate in a floating exchange rate system. The opposite of devaluation is called revaluation.
Depreciation and devaluation are sometimes incorrectly used interchangeably, but they always refer to values in terms of other currencies. Inflation, on the other hand, refers to the value of the currency in goods and services (related to its purchasing power). Altering the face value of a currency without reducing its exchange rate is a redenomination, not a devaluation or revaluation.
Historical usage
Devaluation is most often used in situations where a currency has a defined value relative to the baseline. Historically, early currencies were typically coins struck from gold or silver by an issuing authority which certified the weight and purity of the precious metal. A government in need of money and short on precious metal might abruptly lower the weight or purity of the coins without announcing this, or else decree that the new coins had equal value to the old, thus devaluing the currency.
Later, paper currencies were issued, and governments decreed them to be redeemable for gold or silver (a gold standard). Again, a government short on gold or silver might devalue by abruptly decreeing a reduction in the currency’s redemption value, reducing the value of everyone’s holdings.
Devaluation in modern economies
Present day currencies are usually fiat currencies with insignificant inherent value. The value of currency is determined by the interplay of aggregate supply and aggregate demand within the macroeconomy. As some countries hold floating exchange rates, others maintain fixed exchange rate policy against the United States dollar or other major currencies. These fixed rates are usually maintained by a combination of legally enforced capital controls or through government trading of foreign currency reserves to manipulate the money supply. Under fixed exchange rates, persistent capital outflows or trade deficits may lead countries to lower or abandon their fixed rate policy, resulting in a devaluation (as persistent surpluses and capital inflows may lead them towards revaluation).
In an open market, the perception that a devaluation is imminent may lead speculators to sell the currency in exchange for the country’s foreign reserves, increasing pressure on the issuing country to make an actual devaluation. When speculators buy out all of the foreign reserves, a balance of payments crisis occurs. Economists Paul Krugman and Maurice Obstfeld present a theoretical model in which they state that the balance of payments crisis occurs when the real exchange rate (exchange rate adjusted for relative price differences between countries) is equal to the nominal exchange rate (the stated rate) (Krugman, Paul and Maurice Obstfeld. International Economics (2000), Chapter 17 [Appendix II]). In practice, the onset of crisis has typically occurred after the real exchange rate has depreciated below the nominal rate. The reason for this is that speculators do not have perfect information; they sometimes find out that a country is low on foreign reserves well after the real exchange rate has fallen. In these circumstances, the currency value will fall very far very rapidly. This is what occurred during the 1994 economic crisis in Mexico.
Generally, a steady process of inflation is not considered a devaluation, although if a currency has a high level of inflation, its value will naturally fall against gold or foreign currencies. Especially where a country deliberately prints money (a usual cause of hyperinflation) to cover a persistent budget deficit without borrowing, this may be considered a devaluation.
In some cases, a country may revalue its currency higher (the opposite of devaluation) in response to positive economic conditions, to lower inflation, or to please investors and trading partners. This would imply that existing currency increased in value, as opposed to the case with denomination where a country issues a new currency to replace an old currency that had declined excessively in value (such as Turkey and Romania in 2005, Argentina in 2002, Russia in 1998, or Germany in 1923). -Wikipedia
Ethiopian GDP 1.2 trillion birr. A few weeks a go Meles said it and it happened. Is Ethiopia becoming the next Zimbabwe?
My instinct is telling me that, in 3-5yrs, Ethiopians will be Millionaires and Billionaires just like Zimbabwean were few months back. And they have to carry birr to buy a slice of bread.
What a sad time!
Wow!
Very sad for the people of Ethiopia but rich people who looted public property are gonna lose their money to import luxurious items.That is punishment for those who collected cash just sitting idle,now it is nada!no value at all!
Millions of Ethiopian Birr can’t buy even a cadilac car.oops!what a mess!
Woyane are making Ethiopians poor. On September 1, 2010, for first time in history, Woyane caused Ethiopian money value less than Eritrean money, One USA Dollar exchanged for 16.4322 Ethiopian Birr, or 14.9634 Eritrean Nakfa. Shame on Woyane for it’s deceptive 12% growth, 99.6% election, and real 99% poverty.
I am actually amazed that woyane devalued birr.. because the birr is ..was..has been always kept artificially up by successive regimes to portray a non existent money power.. I say woyane was pushed or forced either by world bank or IMF to adjust the ETB from time to time… cause considering our low export, economy and generally stagnant agricultural and industrial activity the birr’s actual rate to the dollar might even go up as high as 25 to 30 to the dollar…not ideal for Ethiopians at all..but deflation can be attained not by artificially pegging a currency… it actually works by actually bringing economical change… by having a robust economy… so wegenoche..whatever the birr value.. unless we have a strong economy…it is worthless.. … but for the sake of the situation at hand.. I say its bad for the people back in Ethiopia.. while its looks like its going to be good for the diaspora.. specially for the ones who borrowed money before the devaluation.. can now easily pay with stronger dollar.. :(
hope we soon will reunite to kill woyane and have a sane government who will bring about real development and relief to our people
death to woyane…
Afetr all the theortical mambo jumbo what we can easily conclude is that the average Ethiopian citizens are again the losers of this sudden shock (16%) in the monetary (macro) system. For old-time investors/savings, etc in the National Banking system, their “wealth is disappearing” day by day The traditional savors
dear Genfel the woyane @# 9,
two things you need to know…
1) you collectively insulted the readers of this site and i am assuming you included yourself… as you came in here long enough to know about us..(enough with the politeness… you are the biggest dumbass ever!!!) this site to mention the least has some freedom of speech.. let me put it to your level.. you can say whatever you want whether opposition or not here..while we can say Nada… @ your bosses’ news outlet.. namely ETV..Addis Zemen etc…. see the difference!!! and since when devaluing money is good for economy? the only time it helps is when what you get from export is much greater than the amount you spend for import… and are you gonna tell me another lie… and say Ethiopia is getting more money from export than the money spent on import….I don’t think so!!oh…no better.. I Know it isn’t so… silezih…shut up… devaluing our money now is not for the economy or the people.. its because woyane cannot keep the money high up forever without true economic development so the financial institutions will put pressure on it to put birr to its true value.. which is even probably worse than 16… but since Meles can lie his way to his western.. friends about double digits… they probably let him get away only with 3 birr increment… oh ya.. before you say anything.. its true.. when a country so much depends on loan and aid… other bodies can have a say as to how correctly your money is valued as it affects the value of the money they keep lending you:)..why am i even trying? u probably are one of the hodams… who had a share of the pie ha ha ha.. gottcha!!!
All said the Woyane click would make an enormous benefit from the devaluation. The Woyane importers had inside information and have opened LC for import goods or imported the goods already to rip of the people and hurt the uninformed business people who will import after devaluation. Using inside information they always embezzle the people and make business miserable. from the inside information. Woyane is a Mafia which makes laws, does businesses, ripes of the people, and thrives. It is a bug that grows on peoples’ blood.
Those talking about whether import or export is better. It is almost always better for the country if there is more Export rather than import. By allowing more export, you are bringing confidence and innovations to the people therefore less need for import because you have “Made in Ethiopia” products. Of course, import is also important the type of goods that Ethiopia does not have but need. World economists have asserted this fact that export brings wealth to the country at least makes the people healthy and wealthy. This is the fact. Now in Ethiopia’s case, Weyane and the Ethiopian people are enemies. Weyane definitely does not want for the people to be healthy and wealthy by producing their own goods and services. This will bring confidence. Since Weyane has issues with Ethiopian people particularly the majority that Weyane considers not their kind, Weyane does not want to distribute the wealth because of inferiority complex. It want to oppress Ethiopians so that Weyane and their followers can live with maximum amount of wealth which called “greed”. To protect their security from the mass, then they have to abide by foreingers which their are doing. Please, those of you, read, research about this.
People,
In order to understand devaluation, stop spreading false economists theory that is designed to benefit some and harm others. Do your own research. Look up nations that devalued their currency and see where they are not interms of their dictators if they have one but interms of their people and the economy of the countries and see if Ethiopia’s currency devaluation is appropriate or not. But do not keep perpetuating economists’s theory that works only for certain groups but devestating to others. So do not repeat it here.
that is good idea and forward for economy of Ethiopia
I am not Economist but from my understanding how this cancer woyane and their stooges are benefiting by devalued Birr..
1-it will be very hard for the average Ethiopian to bay any imported material cos that will be very costly now they have to come up with more birr to get that product.therefore they will be forced to decline from baying.
2ND that will slow foreign import therefore less hard currency to pay(that is good for Woyane= more loot.
3rd export more such as coffee,flower for more hard currency again more loot for Woyane and there stooges.
Please! Anybody help me why our money is devaluing cotinually?
Ethiopia is an importer and has this persistent problem of trade deficit. Current year deficit is close to 7 billion dollars. Those of us in the USA might have heard how politicians and policy makers complain the trade deficit USA has against China. And billon dollar for a poor country like Ethiopia is very huge.
For all imports we need dollar, unfortunately the central bank in Ethiopia has dollar reserve that lasts only less than three month. Ethiopian business people who have the money and would like to import will not be have the dollar they need. One option the Ethiopian bank did is make dollar expensive by 17%. For local people that translates to paying 17% more for gas, cell phone and all other electronics to mention some trivial examples that the country doesn’t manufacture.
For Ethiopians Birr Devaluation = inflation
Probably the following will explain what it means for local people.
September 1992 official exchange rate 1USD=2 Birr, Air ticket price to Belgium I paid ~ 2,300 Birr
October 1992 official exchange rate 1 USD = 5 Birr, Air ticket price to Belgium my wife paid 5,750 Birr
I am sure people who bought their flight tickets few days ago will be required to match the new value in Birr. I guarantee you all flight tickets will be the same in dollar but will be higher by 17% in Birr.
We shouldn’t mix up the economics with politics.
Here is the thing: for simple and realistic explanation Getachew’s post (#12) is the best. Ethiogirl (#18) started good, but mixed up with emotional sentiment about the Ethiopian govt.
Certainly, after analyzing the Ethiopian economic growth trend, which was opposite to the regime’s claim, IMF has been pushing the Ethiopian govt to take this kind action some six months ago. They suggested about about 10% devaluation at the time to be reviewed periodically and might continue devaluing until it gets close to the point it reflects the real economic situation in the country. I didn’t understand why they waited this long and eventually jumped to devalue that deep at once. Something behind? Who says no? When such a drastic decision is made, there are always some insiders behind the scene who would benefit from the move, while some encounter undesirable losses.
If you remember the first devaluation from $1=2birr to $1=5birr, there was certain group who turned multimillionaire overnight. This group was given a chance (deal) to take over the whole stock of coffee from a Coffee corporation in birr and export it, then import spare parts in return. Eventually, the govt devalued the currency. Imagine the wealth for that group!!!
This time too, no one says that there were no such arrangements behind that would make certain groups much richer. There was a wide rumor that some Richie were buying dollars from every corner of the city days/weeks before the devaluation to the extent the black market goes out of dollar. I can leave this for your judgment and further assessment as to how far the rumor was true !! To me, it is most likely.
In general, this devaluation would be a disastrous for those who live with a fixed income (salaried employees) because it takes 17% of their income away or decreases their purchasing power by that amount. Also it would be bad for others too since all of the imported basic goods rise at least by that level. We also shouldn’t forget how local retailers behave when such things happen.
In regards to the surface claim by the govt to increase export and decrease imports, I don’t buy it because they have already been trying their best to promote exports for every exportable goods, which are mainly agricultural products. What to increase, and where to get more from, not yet known. I am not sure those high rise buildings would be exported with this move! Where is the manufacturing industry??? That would be the core question.
In fact, it may limit imports to a certain extent by making imported goods more expensive, but still richies will demand to have imported goods, as long as they could afford.
The overall effect of all this would be the skyrocketing inflation. Okay, then what? People are going to carry a lot of birrs to buy a small groceries; that means, a lot of Ethiopian birr would be out in circulation with a lesser purchasing power. Eventually, the central bank will raise the interest rate, trying to control the inflation. Another Spiral !!!
Only God can help to get out of this vicious circle!!!