The Ethiopian government has made the decision to transition the foreign exchange transaction rate to be governed by the market system. As a result, the foreign exchange management system has shown improvement since Monday, July 22, 2016.
According to the National Bank’s statement, the foreign exchange management reform will be carried out in accordance with the new foreign exchange guidelines.
The National Bank of Ethiopia has announced that the foreign exchange management system will now operate under a market system, where exchange rates will be determined between banks and their customers. The bank’s role will primarily focus on market stabilization.
The interview with Ato. Kabur on the BBC commenced by exploring the potential impact of the new foreign exchange trading. This inquiry seeks to uncover the potential implications and changes that may arise from this development.
Ato Kabur Gena: The novelty of the new policy lies in its transparency, with plans for implementation already announced. The recent increase in foreign exchange rates may lead to market speculation, causing fluctuations in currency value. Conversely, a market-based exchange rate undermines the purchasing power of the local currency, impacting businesses that rely on imports. As the cost of imported inputs rises due to a stronger dollar, consumer prices are likely to increase, further exacerbating living conditions.
BBC: The recent policy seems to align with the endorsement of the International Monetary Fund (IMF). Can this funding provide a lasting remedy for Ethiopia’s foreign exchange management to maintain market leadership?
Ato Kabur Gena, The funds in question should not be regarded as “support,” but rather as a loan, which is not a one-time payment but rather a measured disbursement. The release of these funds will occur only after the requested changes have been verified. It is important to recognize that the IMF and the World Bank are not acting out of goodwill towards Ethiopia; this reflects a broader perspective. The Prime Minister has likened borrowing from the IMF to borrowing from one’s mother, yet fundamentally, it remains a loan that requires repayment. The critical question is whether we are in a position to fulfill this obligation. In my view, the restoration of peace, stability, and the rule of law is essential; without these, the financial assistance may ultimately be squandered.
BBC: For instance, Kenya, a neighboring nation, regulates its foreign exchange via market mechanisms. What risks does Ethiopia face if it adopts a similar approach? In what ways does Ethiopia’s situation differ from the market policies of other countries?
Ato Kabur Gena , In recent weeks, Kenyans have been participating in peaceful demonstrations due to the unfavorable terms of the first IMF and World Bank loans. The impact of these loans on the standard of living, particularly in health, education, and infrastructure, has led to rising concerns among the people.
While the liberalization of the market played a role, the conditions imposed by the IMF and World Bank for loans have been a major cause of distress for many countries. There is a fear that the current situation will not improve unless these conditions are reconsidered.
One of the key challenges faced by the country is the need to enhance its manufacturing capacity. With high interest rates reaching up to 20% in Ethiopia, companies struggle to make profits and pay off debts. This poses a significant obstacle to economic growth and development.
BBC: Some argue that the true value of the dollar lies in the parallel market, suggesting that fluctuations in the official bank exchange rate are insignificant. However, the question remains: is this concept valid?
Ato Kabur Gena, The dollar’s exchange rate in the parallel market is not a viable solution for the country’s development or improving people’s lives. Some countries establish interest rates for essential development resources, while different rates are set for other purposes.
For instance, products aimed at middle-income consumers may be priced on the black market, but when it comes to acquiring production tools, it is crucial to go through the National Bank. The assumption that the dollar’s value will increase when it is equal in the market has not been proven in other countries.
It is essential to base the country’s development direction, loans, and support on the experiences of East Asian nations like Korea and Japan. Our banks should focus on an interest rate that can yield positive outcomes, ensuring that the development direction is thoroughly reassessed.
BBC: The market is currently experiencing imbalances in income and expenditure, with low levels of Foreign Direct Investment (FDI) and a lack of peace and stability. There are discussions about the potential intervention of the IMF to bring stability to the market in the short term. Are you concerned about the future implications of these developments?
Ato Kabur Gena, It is essential for us to live within our financial means. The current disparity between income and expenditure can be attributed to our inability to maximize our potential. Additionally, the lack of prioritization of key sectors has contributed to this imbalance. I am skeptical that the measures implemented at this time will yield immediate results.
A significant transformation will require a timeframe of at least one to two years. Specifically, the production and export of commodities such as sesame and coffee necessitate considerable time and effort. Therefore, expecting substantial changes within a one- or two-year period seems unrealistic, although I do not anticipate a deterioration of the situation in the near future.
The government has initiated various measures aimed at alleviating these issues, such as maintaining current rent levels and contemplating salary increases for public sector employees. While these actions are commendable, they should not be viewed as a cause for celebration. Claims from the media suggesting that the foreign exchange market has been stabilized are, in my opinion, misleading and do not accurately reflect the underlying economic conditions.
BBC: Previously, the market functioned under a fixed rate set by the government, but now we have transitioned to market-oriented policies. If we doubt the effectiveness of the new policy, what alternative do you believe is most suitable?
Ato Kibur Gena, My perspective on interest rates aligns with the views expressed by economists in the past. The question of whether interest rates benefit me or hinder me, and whether they stimulate industry growth, remains pertinent.
It is important to note that there is no single “interest rate” that dictates the market. Rather, it is the market that influences interest rates. The determination of at what interest rate a company can operate profitably and repay its debts to the bank is crucial.
Examining the situation of interest rates in the United States reveals a similar scenario. The market dynamics have led to growth, impacting organizations’ decisions to expand or contract. The timing of interest rate adjustments is a critical factor in market operations.
BBC Amharic
As a layman, it is concerning to see the floating of Birr when Government priorities are set by an all-powerful Prime Minister who dictates to a hopelessly incompetent and uneducated macro-economic committee which has proven to be a total failure over the past 5 years. The Government is not accountable to the people or to any neutral elected organ since the constitution allows him, as leader of a large ethnic group, to be all-powerful. The current constitution is falsely labelled as a basis for a federal democratic republic when it is neither democratic nor federal; the Prime Minister controls all three government branches, and he can also appoint and dismiss any leaders of regional governments, as he has continuously done in the Amhara region. To add to these problems is a government-created civil war which is still wide-spread in several parts of the country which produce the principal agricultural products for export and for home consumption so that conditions for raising exports and local food security, including conditions for FDI flows, are practically absent.
I am worried about the added risks of wide-spread instability due to the on-going civil war, possible war with one or more neighbors, the further deterioration in the cost of living and the
overall problem of poor governance that is the principal cause of these problems. What is surprising is that, with all the economic and political information available to them, IMF and World Bank have judged it proper to reach an agreement to give huge loans when the Government’s publicized priorities are to buy guns to kill its own citizens and remain in power at any cost, and where conditions with all neighboring countries are also far from friendly, all contributing to a highly likely failure to pay back these and other loans; sadly, their timely repayment, regional development, peace and security appear to be relatively unimportant to IMF and Wold Bank.
Because of why my email is not pupleshed?