The national bank of Ethiopia has just announced the devaluation of birr by 15% starting from tomorrow October 11, 2017, as reported by Fana Broadcasting network. The rationale behind the devaluation is to increase foreign trade. The bank has also announced the lower saving accounts interest rates have grown from 5% to 7%.
The reason for the decision to devalue the birr is since foreign trade has declined over the past 5 years and the Birr is considered to be overvalued. This means that the exchange rate is higher than the general price of other countries. However, frequent devaluation indicates that the tactic isn’t, in reality, successful and that further inflation is a high risk, especially in the current Ethiopian economic condition.
Many economists believe that a weaker currency is actually quite beneficial in terms of securing export revenues, decrease trade deficits and reduce debts of the country, as it is believed that the revenue secured from the aforementioned foreign trade could be utilized to pay off foreign debt.
In circumstances such as this, where the currency is devalued suddenly and drastically, there is a fear that an unfair result would be unavoidable; the interests of some might fall into risk. This is due to the considerable imbalance of power between those who have a direct economic connection with the export revenue and those that have less economic power.
The items Ethiopia exports are what determine the success, or otherwise, of the decision to devalue the currency. In the past, Ethiopian export performance wasn’t as expected. Nevertheless, demand for birr is expected to rise; starting from tomorrow, the value of one dollar will go from 23.4177 to 26.9303 with an increase of 15%.