Posted by OromianEconomist in Currency Devaluation, Economics, Ethiopia the least competitive in the Global Competitiveness Index, Free development vs authoritarian model, Uncategorized.
Tags: Devaluation, economics, economy, Ethiopia's Birr, Inflation, Inflationary Devaluation
Economic Analysis: The cost of devaluing the Ethiopia’s Birr may outweigh its benefit
By Dr Mohammed Abbajebel Tahiro
The link between currency devaluation and domestic inflation
Ethiopia has been devaluing the Birr, in part because of pressures from the International Monetary Fund (IMF). Cheaper domestic currency, Vis a Vis major international currencies, makes exports more attractive to foreigners if a decent segment of the economy is based on manufacturing or, if the manufacturing sector is expanding and looking for international markets. Devaluing domestic currency makes exports more attractive to foreigners, which in turn spurs economic growth. The flip side of that is, cheaper domestic currency makes imports more expensive. Ethiopia imports medicine, fuel, food, and almost all productive capital, vehicles, and many more consumer goods. Cheaper currency means it takes more Birr to buy one foreign currency. Ethiopian importers will naturally raise their prices (inflation) to cover additional costs incurred because of a weaker Birr. The cost of devaluing the Ethiopian Birr may outweigh its benefit as the Ethiopian economy is still largely agricultural. The demand for agricultural products and minerals on the world market is largely stable and Ethiopia does not need to cheapen its currency to sell more to foreigners. The reason Africa can’t get a foothold in manufacturing is Chinese dumping of cheaply manufactured goods, not inability to access world markets for Africa’s manufactured goods. African infant manufacturing industry simply can’t compete with predatory practices of foreign manufacturers.
Ethiopia could simply let the exchange rate float. A floating exchange rate means the price of the Birr vis a vis major international currencies is determined by the relative supply and demand of the currencies. Consider the U.S. Dollar and the Birr are just goods like any other; say salt, just as in a free market the price of salt is determined by the supply and demand of salt, the exchange rate (price of Birr in Dollar) will be determined by the relative supply and demand of the two currencies. The United States follows floating exchange rate. In Ethiopia, the exchange rate is fixed by the National Bank. Fixed exchange rate always creates arbitrage opportunities as it seldom reflects the will of the international currency markets. The latest devaluation of the Birr ( 1USD = 27.07 Birr) will undoubtedly create more domestic price inflation as Ethiopian importers will raise prices on their imported goods. With the increase in the wage rate trailing far behind increase in prices, workers are getting a wage cut in real terms. Rising general level of prices means rising input prices. When input prices rise, manufacturers cut back on output, which means even more unemployment.
Inflation, two fundamental factors
When the Ethiopian parliament opened on Monday, President Mulatu Teshome made bold claims about the state of the Ethiopian economy. I will address the merits/demerits of that claim at a later date. Today, I will talk a little bit about the fundamental causes of domestic currency devaluation (inflation). There are two fundamental causes of currency depreciation:
1. The productive capacity of an economy.
2. The size of the money supply.
When an employee creates more value through increased productivity, his/her salary should increase proportionately. If the money supply in a country is fixed while productivity is increasing, each unit of currency will store greater value. On the other hand, if the increase in the money supply is proportionate to the increase in productivity, the amount of purchasing power (value) stored in each unit of currency remains unchanged. But, if you have a runaway money supply, that is, if the money supply grows faster than the growth in productivity, the value stored in each unit of currency decreases, and we call that inflation. When there’s more money in the economy than the productive capacity of the economy, the general level of prices increases and we call that demand-pull inflation. When prices of productive inputs rise, producers increase prices on finished products in order to recoup higher payments for input and, that can also lead to inflation; inflation created through an increase in input prices is called cost-push inflation. This source of inflation is less likely in Ethiopia as the manufacturing sector contributes less than 40% of the Ethiopian GDP.
The American Federal Reserve Bank’s counterpart in Ethiopia is the National Bank of Ethiopia. The National Bank is supposed to oversee the monetary policy of the country, including managing the money supply. The National Bank is supposed to be independent of undue political influence from the executive branch of the government. In Ethiopia today, appointments to key positions in the National Bank are based more on loyalty to the regime than professional aptitude. With that in mind, it’s easy to see how monetary policy could be mismanaged.
Ethiopia’s Attempt to Ease Dollar Shortage with Devaluation
By Barii Ayano
This is just to offer basic explanation of the issue without technical jargons. Exchange rate is the price of one country’s currency in terms of another country’s currency. For instance, the price of Birr in terms of U.S. dollar or vice versa. Exchange rates affect large flows of international trade (imports and exports). Foreign exchange facilitates flows of international investment, including foreign direct investments (FDI. Countries follow various exchange rate regimes: fixed exchange rate, pegged exchange rate, floating exchange rate, and managed floating exchange rate. The exchange rate regime of Ethiopia is characterized as managed floating exchange rate regime, which partly depends on supply and demand but with some government intervention in the exchange rate market, to concurrently adjust both exchange rates and foreign exchange reserves, monitored by the World Bank and the International Monetary Fund.
What is Devaluation?
Devaluation is mainly government intervention in the exchange rate market of the country to determine the price of Birr in terms of dollar-some kind of government price setting. Simplified, devaluation makes Birr cheaper relative to the dollar, and hence you will need more Birr to get a dollar, compared to the current rate of exchange. In short, you need more Birr to buy a unit of dollar, and the people who can afford to buy dollar declines.
The recent announcement states that Ethiopia devalued its currency (Birr) by 15% per cent, which means you will need 15% more Birr to buy a dollar since Birr has become cheaper by 15%.
Why Do Countries Devalue their Currencies?
There are several reasons behind the need to devalue currencies. Some do it to promote exports and restrain imports. The simplified assumption is this. If the local currency becomes cheaper due to devaluation, foreigners can buy the local export products more cheaply and hence exports will increase. On the other hand, cheaper local currency can serve as an import restraint since foreign products become more expensive in local currency and importers need more Birr to buy foreign products, and hence increase the cost of living.
When it comes to the developing economies like Ethiopia, with limited export promotion power, the devaluation policy measure is mainly related to exchange rate stability due to imbalance between supply and demand of hard currencies. As repeatedly explained by the government officials, including the PM & the President, there is severe shortage of hard currencies in Ethiopia caused by limited hard currency earning power of Ethiopia’s exports whereas imports have grown folds more than exports. Ethiopia gets dollar from exports and needs dollar for the imports. The gap between the dollar earning and dollar spending capacity leads to part of the current account deficit called trade deficit (export values greater than import values). The gap has been expanding every year-even more so in recent years.
If you buy something (imports) you have to pay for it via exports, foreign aid in hard currency, remittances, etc. The growing gap between exports and imports is not sustainable. It’s important to note that foreign exchange rate crisis is one of the major sources of economic crises that ravaged the economies of a number of countries. Google exchange rate crisis to read more about it.
Therefore, the devaluation of Birr, which has been urged by the World Bank for years, is the policy measure undertaken by the regime to relieve a crippling dollar shortage and meager foreign exchange reserve of Ethiopia. The World Bank, EU, IMF, etc. cover the foreign exchange gap of Ethiopia so that the economy does not collapse due to the shortage of foreign exchange. Without international support and the Diasporas remittance, Ethiopia can easily become hard currency illiquid country that cannot pay for its imports or pay for its debts in hard currency.
Although the shortage of hard currency is a common phenomenon of poor countries with limited exports, the widening gap between Ethiopia’s earning and spending in hard currency is evidently not sustainable. It can kill economic growth. At worst, it can lead to economic crisis due to currency (exchange rate) crisis since there is vivid evidence of liquidity gap in hard currency in Ethiopia owing to its weak foreign exchange earning capacity. Illicit outflow of hard currency is another key problem aggravating the pain.
Simply put, devaluation is not a success story as some want us to believe. It’s a desperate policy measure undertaken to ease the pain of severe shortage of hard currency and its adverse impacts.
I will highlight the effects of devaluation on consumers, business, foreign exchange shortage, etc. in my next note.
A brief analysis of Birr devaluation
Posted by OromianEconomist in Uncategorized.
Tags: Abusive power, Aphartheid, Corruption, Development, Dictators, Economic Aphartheid, economic sabotage, economy, Ethiopian People's Revolutionary Democratic Front, Gadaa System, Human rights violations, Meles Zenawi, Oromia, Oromia Region, Oromo, Oromoo, Politics, Poor Goveranance, racial discrimination, Tigray Region, Tigrayan People's Liberation Front, TPLF, Tyranny, Undemocratic System, Underdvelopment
From the outset TPLF defines itself as a liberator for one specifically racially defined group. And still after two decades on power, irrespective of its ostensible claim that it is under the umbrella of EPRDF, people of the same origin monopolistically has held the whip-hand; and the whole country has been cash cowed by one specific racial group while the majority is being treated as impediments.
The apartheid nature and characteristics of TPLF’s policies and behavior is as covert as possible to throw the majority into total muddle until it is too late. To put it bluntly, the fledgling apartheid system of TPLF is emerging through a frog boiling tactic.
The TPLF’s apartheid system can be described as a subtle state action designed to secure and maintain the Tigrian domination by furthering their Economic and Political interests through control over the majority Non-Tigrian population.
The following categories make the necessary, sufficient, and defining characteristics of the emerging tender-plant apartheid system in Ethiopia:
1. Economic Interest
Furthering the Tigrean economic dominance is mainly achieved through a threefold economic sabotage: i.e.,
Through the creation of Tigrian tycoons in every facet of the economy;
By building extractive business empire;
Through emasculation of Non-Tigrian business firms.
Let’s see each of the above points in detail.
1.1 The incubation of the Tigrian Racketeers: Unlike the loosely dispersed and individualistic Non-Tigrian business men, the Tigrian racketeers are a highly organized kleptomaniacs that are exclusively nurtured by the under-table action of the government in a way that:
– Favoring to get loan from state-owned banks with least or no collateral;
– Facilitating the bureaucratic process in the Custom office with least search procedure while this government office intentionally delays the items that belonged to the Non-Tigrian business men.
– Government toleration for their criminal act of tax evasion.
– For the Tigrian importers, letter of credit will be processed easily and access to hard currency is almost unlimited; whereas the Non-Tigrians must wait a minimum of 4 to 6 months since their application.
– The government has granted them key business sites under low bid.
– The government conducts special training programs and video conferences to create situational awareness among them and update them with first hand information. At this point, we must not forget that nowadays information is equivalent to money.
On top of that, they have been informed /’’trained’’/ and equipped with the following racketeering tactics.
1. Insider Trading: Obviously all key governmental positions are occupied by the Tigrian; which means any policy or information particularly related with business reaches to the Tigrian racketeers before the crowd gets it so they adjust everything in advance to suit to the new condition. And due to such a prior knowledge they net millions from insider trading.
They also have foreknowledge on every government auction however the Non-Tigrians get it lately from news papers. For insider information equals ‘’money’’ in a modern market economy, it is a great power in the hands of people who are the most cohesive and organized criminal group like the Tigrian racketeers. As a matter of fact, insider information is illegal both from moral and law perspective.
2. Dual Set of Ethics: In fact, the Tigrian racketeers have been informed directly or indirectly to practice a dual set of ethics:
I. An altruistic set of ethics for themselves and
II. A predatory one for the rest of Ethiopian people.
– They don’t compete with one another for a single niche of market;
– They don’t interfere with the monopoly controlled by other Tigrian racketeer;
– They are barred from underbidding fellow Tigrian racketeer.
– They are always cooperate with one another so as “not to lose the money of Tigray”
3. Team Strategy: Before we go to how they act in team, let’s see the psychological set up of the Tigrian racketeers and the Non-Tigrian business men.
The Non-Tigrian have been conditioned to think that everyone must be judged on his or her merits and that it would be immoral to be biased for his own race. The Tigrian racketeers, on the other hand, have been conditioned from early time of TPLF to think in terms of the good of their race.
Keeping this fact in mind, what they are practicing is through “Infect to insolvency and then wait to takeover” approach. For example, if they need to monopolize certain business sector they allocate a calculated sum of money to under bid the price of item which certainly makes the Non-Tigrian competitor unable to fight with irrationally low price then put the competitor company into insolvency and finally buy the company itself with a giveaway price and will apply “the abuse of dominance” once they control the sector.
In general, a cohesive and powerful team effort, dual set of ethics along with insider information consistently amasses collective power to the Tigrian racketeers over a scattered and individualistic Non-Tigrian.
1.2 By Establishing Extractive Trade Empire: An acronym EFFORT stands for the TPLF’s multi-billionaire trade empire called Endowment Fund for the Rehabilitation of Tigray. It was established by expropriating capital equipments from different parts of the country and by the infamous defaulted bank debts. Currently there is no business sector that is free from the involvement of EFFORT. It stretched from production to distribution, from finance to insurance, from wholesale to retail, from real-estate to horticulture, from mining to IT. Peculiarly, this trade empire hasn’t ever been audited by external auditor nor repays the loan it borrowed periodically.
Similar to the Tigrian private companies, EFFORT is also privileged in the following manner:
– It is awarded government auctions of big projects;
– Favored to borrow in billions without collateral and it is not subject to repayment;
– Equipped with insider information;
– Granted fertile land at a giveaway price by displacing tens of thousands of indigenous people from their ancestral land;
– Granted key mining sites without open bid;
– Market opportunity will be arranged for it by forcing regional and federal offices to buy products which haven’t a relevant importance or in an exaggerated quantity.
Surprisingly, almost 99.9% of the employees in these innumerable companies of EFFORT are Tigrian; which means that majority of the economy is occupied by either the Tigrian private companies or by the extractive trade empire called EFFORT; and they primarily privileged job opportunity for Tigrians. As the complete cycle of economic dominance and privileged labor market portrays, we are under a severe economic genocide.
1.3 Stifling of Non-Tigrians’ Business Firms: Obviously the playing ground is not level; and the whole situation is an uphill battle for Non-Tigrians’ business firms to survive all the barriers that they faced from the government bureaucracy and from economic sabotage of the highly privileged EFFORT companies and the cohesive Tigrian racketeers. Consequently, especially after election-2005 we have seen that many Non-Tigrian businesses have been either liquidated or down-sized.
2. Political Interest
The foremost plan of TPLF was to secede the Tigray region from the rest of the country and to establish a sovereign republic, as plainly stated in Manifesto-68 which was formulated by the triumvirate of Abay Tsehaye, Sebhat Nega and Meles Zenawi. However, through time they inferred that a sovereign republic of Tigray would be a weak and failed state. Then they changed their program to live together as a state-within-a state and TPLF’s role as a Quasi-Occupying Force.
Similar to the case for economic dominance, TPLF and Tigrians maintain their political dominance using racial solidarity as weapon against the Non-Tigrian Ethiopians in the following manner:
2.1. Surrogate Colonization /Repopulation/: The TPLF apartheid system has also been featured with Depopulation andPopulation-Transfer. The annexation of arable lands of the Amhara region like Humera, Welkayt, Tsegede, Alamata, Korem and so on, to Tigray province and depopulating the indigenous Amharas from those places and then replacing with Tigrians is a case in point of the surrogate colonization of the TPLF regime. The expansion of Tigrians is also continuing in west and north Gondar to annex the North Mountains after they learned that the North Heights are fields of Gold and other Precious metals.
2.2. Expropriation of Land /Landed Property/ Belonging to A Racial Group: As a matter of the truth, the people of Gambella have been denied its natural right of living on its ancestral land. And clearly we know that more than quarter of arable land of the region has been awarded to land grabbers at a giveaway price by TPLF megalomaniacs. But beside to this, more than 2/3 of the remaining arable land has been expropriated by Tigrian Mechanized-Farm owners in which it left more than 70,000 indigenous people for forcible relocation to the place where the soil is dry with poor quality and with no infrastructure. What worsened the situation was that the deployment of the TPLF mechanized army upon the unprotected civilians to enforce forcible relocation of the indigenous people. As a result, they became victim of genocide, rape and conflagration of their villages by TPLF militias.
2.3. Deliberate Denigration of Living Conditions of Non-Tigrian Racial Groups: This includes:
– Demolishing of business areas under cover story of investment which are mainly occupied by Gurage business men in the capital city of Addis Ababa. Particularly after election-2005, the Gurages have been profiled as “Accomplice of Neftegna” and currently as “Ginbot-7 Sympathizers”; and consequently, they are paying the expensive price ever for the alleged charge.
– Internal deportation and expulsion of hundreds of thousands of the Amhara people from different parts of the country by confiscation of their tenure and property is also one of the cruelest repressions of the racist regime of TPLF in order to break the potential resistance from this group by throwing them into absolute destitution and instability.
2.4. Infliction of Serious Bodily and Mental Harm upon Certain Racial Members: Tens of thousands of political and Conscience prisoners are concentrated in three federal and 120 regional major prisons. They are also found in an unofficial detention centers in military camps including in Dedessa, Bir Sheleqo, Tolay, Hormat, Blate, Tatek, Jijiga, Holeta, and Senqele. Majority of the prisoners are racially Oromo; and their alleged charge is “Sympathizers of OLF”. The number of Amhara, Gambella and Ogadenese political and conscience prisoners are also significant.
The condition of these political prisoners is extremely harsh, overcrowded and life threatening. Besides, the TPLF henchmen often use a series of torture and brutal interrogation to extract confessions including whipping on the soles of feet, over stretching of limbs, slow dripping of water on the head, slandering of their race, pulling out of nails, forcible extraction of teeth, weights suspended on testicles, plunging into spoiled water, solitary confinement in dark cell for long period of time, signing a confession, forced self-incrimination, threatening with injection of HIV infected blood, forcing to denounce others, burning with cigarette, insertion of bottle and hot candle into prisoners’ rectum, drowning into ice cold water for long period of time and beating with rifle butt, stick, whip, belt etc.
2.5. Access: No matter how the Non-Tigrians have the qualification for the high post in the army or the security apparatus or for key government offices, they have already been denied by the unwritten law of TPLF. Access to government-sponsored scholarship at the overseas is also highly secured for Tigrians.
In conclusion, Ethiopia is a country of nations and nationalities. So there must not be room for the socio-political and economic dominance of single race. All the people of Ethiopia must be treated as an empowered citizen. The fledgling Tigrian apartheid system must be nipped in the bud before it sparks the bloody genocide.
As a universal truth, no one ever negotiated successfully from weakness, but from strength. It must be our primary target to be strong. And, I do personally believe that awakening to the truth will make us strong. We are now in the middle of life-or-death struggle; if we fail to break the yoke of TPLF’s apartheid system the future of our people, the continuity of our race and the stability of our country will be at stake.
We have left nothing with TPLF; we have been cornered, humiliated, persecuted, harassed, assaulted, exiled, locked-in jail, tortured, expelled, impoverished by design, confiscated and decimated. We must not have room for the source of all these evil, TPLF, anymore!!! We must fight it by all possible means until we regain our freedom!!! We must struggle desperately until we tear apart the reins of the Quasi-Occupiers!!!
On the other hand, the Tigrians must also do their own homework before they are being treated as:
– Accomplice of Criminally guilty TPLF officials;
– Politically guilty as TPLF Supporters;
– Morally guilty as Tigrians;
– And perhaps, metaphysically guilty as Ethiopians.
Facts about Tigree Domination in the Military
High Ranking Military Officials , see http://ayyaantuu.com/horn-of-africa-news/ethiopia/the-tplf-variant-on-apartheid-majority-of-the-prisoners-are-racially-oromo/
By Dawit Fanta
http://ayyaantuu.com/horn-of-africa-news/ethiopia/the-tplf-variant-on-apartheid-majority-of-the-prisoners-are-racially-oromo/
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