Experts at Access Capital, a well-known economic research firm in Ethiopia, were taken by surprise when they learned about yesterday’s 20 percent devaluation of Ethiopian currency exchange rate.
In an analysis released today, the firm said: ” The magnitude of the adjustment is a big surprise, not least because most macroeconomic indicators did not show a need for a sharp devaluation at this particular time.”
IMF, on the other hand, came out in favor of the devaluation, saying, “it will help bolster Ethiopia’s competitiveness.” In June this year, the IMF recommended a 10-percent devaluation of the birr.
The following is a summary of Access Capital’s analysis:
In a very bold and unexpected move, Ethiopia’s central bank devalued the Birr by 20 percent on September 1, 2010. The magnitude of the adjustment is a big surprise, not least because most macroeconomic indicators did not show a need for a sharp devaluation at this particular time.
Given the apparently little justification for a large devaluation from a short-term macroeconomic perspective, we see more longer-term and structural motives for the authorities’ actions. More specifically, we think there is now a conscious effort to experiment with a deliberately undervalued exchange rate (the “China Model” one might call it) and to pursue a more aggressive strategy of import substitution. Both these efforts can be seen as being in line with the main objectives of the authorities’ recently released draft Five-Year Growth and Transformation Plan.
The impact of the exchange rate adjustment will be quite adverse for several segments of the business community, but most of the encouraging trends observed with the steady depreciations of the past year—strong export growth, slower import growth, and improving foreign exchange availability—will all be reinforced.
Looking ahead, we think that after a nearly two-year period of rather sharp movements in the rate, economic policymakers will henceforth seek to provide an extended period in which the Birr rate is relatively stable and predictable. Thus, despite the authorities’ demonstrated ability to surprise, we would venture to say that the regular monthly depreciations of the past will be discontinued from here on and that the exchange rate will stay within a very narrow range for the coming year.
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