Ethiopian Birr Devalued, IMF Welcomes Move

By Barry Malone
Reuters
Wednesday, September 1, 2010

http://af.reuters.com/article/investingNews/idAFJOE6800SX20100901?sp=true

ADDIS ABABA - The Ethiopian birr was devalued by 16.7 percent on Wednesday, according to exchange rates published on the central bank's website, a move welcomed by the International Monetary Fund (IMF).

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.

"The IMF welcomes this move given it will help bolster Ethiopia's competitiveness," IMF representative in Ethiopia, Sukhwinder Singh, told Reuters. "It will need to be supported by appropriate monetary policy."

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.

Ethiopia is Africa's biggest coffee exporter and the world's fourth largest exporter of sesame. It is also one of Africa's biggest potential markets -- with a population of 80 million -- and most of its people have no telephones or bank accounts.

The devaluation is the Horn of Africa nation's fourth since January 2009. Devaluations can spur economic growth and reduce current account deficits to the extent they boost exports and discourage imports, although they carry the risk of importing inflation.

'DEPRECIATION LIKELY TO CONTINUE'

"I think it's related to the new five-year plan and a strategy of export promotion and import substitution," Tewodros Mekonnen, an economist with local think tank, the Ethiopian Economic Association, told Reuters.

"Obviously there's a risk it could cause inflation. It will probably also boost foreign direct investment and remittances."

Inflation in Ethiopia hit a high of 64.2 percent in July 2008.

After that peak, the government halted state borrowing and increased bank reserves to drive down the rate.

The country's central bank also instructed private banks to restrict borrowing.

The inflation rate slowed to 5.7 percent in July.

"Years of high inflation have eroded the country's export competitiveness, and the government has continually favoured sharp currency depreciations to counteract this," Joseph Lake, an analyst at the Economist Intelligence Unit, told Reuters.

"Though inflation has eased in recent months, this pattern of currency depreciation is likely to continue. Low levels of foreign exchange reserves, and twin fiscal and current-account deficits will continue to put pressure on the currency," Lake said.

The country -- one of the world's biggest recipients of foreign aid -- is keen to attract foreign investment in agriculture and mineral exploration.

Ethiopia has operated a managed floating exchange rate regime since 1992.

For further reading:
"NBE dispatches the New one-birr coins to banks", Tamiru Tsige & Hayal Alemayehu, Ethiopian-News, September 4, 2010
"Ethiopian Central Bank Says Devaluation to Boost Exports, Domestic Output", Bloomberg, September 3, 2010