IMF Welcomes Devalued Birr

Sukhwinder Singh, IMF representative in Ethiopia.		The International Monetary Fund (IMF) has welcomed last week’s move by Ethiopia’s central bank to devalue the Birr by 16.7pc on Wednesday, September 1, 2010. The Birr was quoted at a weighted average of 16.3514 against the dollar compared with 13.6284 on Tuesday, August 31, by the National Bank of Ethiopia (NBE). The new rate was confirmed by an NBE official who was not authorised to make further comments. The IMF welcomes this move given that it will help bolster Ethiopia's competitiveness, Sukhwinder Singh, IMF representative in Ethiopia, told Reuters. “It will need to be supported by an appropriate monetary policy,” said Singh. An ambitious five-year economic plan, which aims to achieve average annual economic growth of 14.9pc over the period and to end the Horn of Africa nation's dependence on food aid, was unveiled by the government last month. Ethiopia is Africa's biggest coffee exporter and the world's fourth largest exporter of sesame. With a population of 80 million, it is also one of Africa's biggest potential markets and most of its people have no telephones or bank accounts. The devaluation is the country’s fourth since January 2009. Devaluations can spur economic growth and reduce current account deficits to the extent that they boost exports and discourage imports, although they carry the risk of importing inflation.
“I think it is related to the new five-year plan and a strategy of export promotion and import substitution,” Tewodros Mekonnen, an economist with the Ethiopian Economics Association (EEA), a local think-tank, told Reuters. “There is a risk that it could cause inflation but it will probably also boost foreign direct investment and remittances.” Inflation hit a high of 64.2pc in July 2008. After the peak, the country's central bank instructed private banks to restrict borrowing, the government halted state borrowing and increased bank reserves to drive the rate down. It slowed to 5.7pc in July 2010. “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 (EIU), told Reuters. “Although 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 Birr.” Ethiopia, one of the world's biggest recipients of foreign aid, is keen to attract foreign investment in agriculture and mineral exploration. The country has operated a managed floating exchange rate regime since 1992.