To our friends and colleagues in Ethiopia as well as those who visit Ethiopia frequently: can you share with us your observations about life in the country after the Birr devaluation?
- do you witness obvious changes in prices?
- if yes, do you see any difference between the prices of domestically produced and imported commodities?
- can you say that the export sector started to benefit from the policy?
Any feedback is much appreciated.
Thank you Ghassan and Hamit for sharing your insights.
I interviewed selected Ethiopian researchers during the 5th Nile Basin Development Conference late in 2017 in Kigali, Rwanda about the impact of the policy on livelihood. All interviewed shared the view that domestic prices started to increase, by then, which is about 2 months after the implementation of the policy.
The impact on the export sector however may need sometime to start evolving and show benefits of devaluation. It will be good to know more recent insights from the ground.
Dr Ossman, I agree with you to a certain extent that domestic currency ought not be blindly devalued nor would it also be blindly appreciated except to achieve certain national policy priority targets.
@Ghassan, I think your analysis is more of theoretical. Things look different in practice as most of the assumption we use in text book analysis are not practical especially in developing countries where structural rigidity is very common.
@Sebastian, devaluation in LDCs is meant to meet to priorities in most causes.
1. The first is to improve current account balance - to promote exports in order to finance import.
2. But also, such countries need hard currencies not only for financing imports (which is always by far greater than the value of exports), and to repay debts (which is also a common problem in most of the LDCs).
@Ghassan, therefore, so you cannot let the market alone to bring the FOREX market into equilibrium.
@Sebastian, there are always trade-offs as Tinberegen (1951) clearly puts.
Generally, in my view, the long term effects of devaluation (or any policy changes affecting the external sector) would depend on how economic agents respond to the short-term effects (e.g. price spikes, loss in profit, uncertainties in doing business). And, these short term effects depend on many structural features. For example, due to information asymmetry even firms in which imported goods are not part of their intermediate inputs would tend to increase prices.
@Khalid, that is why domestic price responses where too quick to the devaluation.
Dear Sebastain Uremadu,
Many thanks for the insight. I agree with you on that government policy need to keep an eye on how the exchange rate being driven by market forces and intervene adequately. Sometimes however, these interventions are driven by multiple objectives as rightly stated by Amsalu W. Yalew in his comprehensive description above.
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