Ethiopia’s Currency Devaluation: A Recipe for Further Economic Crisis

Dr. Mengistu Musie
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As we observe the confused leadership of Abiy Ahmed and his coalition, which includes the Tigray People’s Liberation Front (TPLF), it becomes evident that as long as they continue to implement misguided economic policies, no external force can save them. The only path to recovery is acknowledging their policy failures and allowing Ethiopia to embrace true democratic discourse and radical change. Global institutions primarily serve the interests of the Western world and are unlikely to benefit the Global South, including Ethiopia. Consequently, these institutions enforce political and economic policies catering to their interests rather than fostering the growth and development of nations like Ethiopia.

Ethiopia’s economy heavily relies on tourism, remittances, and small-scale subsistence farming. Before the war, Ethiopia received over $5 billion in remittances annually from its diaspora communities worldwide. These remittances play a crucial role in the Ethiopian economy by directly contributing to the Gross National Product (GNP) and spending in local markets, stimulating economic activity, and supporting livelihoods.

In recent years, the International Monetary Fund (IMF) has advocated for the devaluation of Ethiopia’s Birr currency. While the IMF argues that devaluation can enhance export competitiveness and correct fiscal imbalances, the potential disadvantages for Ethiopia, given its unique economic structure, must be considered. Devaluation could lead to increased inflation, higher costs for imported goods, and greater financial instability, disproportionately affecting the country’s most vulnerable populations. Additionally, IMF loans, like the $1.5 billion package, add to the country’s debt burden and often come with conditions that require economic adjustments that are only sometimes in line with Ethiopia’s needs or long-term development goals.

It is crucial for Ethiopia to weigh these factors carefully and prioritize policies that foster sustainable development and self-reliance. Successive undemocratic, ethnically based governments in Ethiopia have often chosen to depend on external donors like the IMF and other Anglo-American entities rather than fostering unity and implementing effective policies that

harness the potential of their resources and people. This reliance on external support, while providing short-term relief, undermines Ethiopia’s sovereignty and stifles its self-driven development and growth potential. By failing to resolve internal conflicts and create inclusive, democratic governance structures, they miss opportunities to develop the country sustainably from within.

Ethiopia needs a leadership that prioritizes the country’s long-term interests over short-term gains and external dependencies. By addressing internal divisions, promoting democratic practices, and leveraging the strengths of its people and natural resources, Ethiopia can pave the way for a more prosperous and independent future. The need for genuine reforms is urgent, and a commitment to self-reliance is crucial. Only through these measures can Ethiopia achieve sustainable development and improve the livelihoods of its citizens.

This paper explores the multifaceted repercussions of currency devaluation on Ethiopia, focusing on its tourism sector, remittances, and small-scale agricultural markets. It also considers the potential for price hikes for foreign products.

 

Impact on the Tourism Sector

Tourism is one of the primary pillars of the Ethiopian economy, drawing visitors to its ancient archaeological sites, vibrant festivals, and stunning landscapes. Currency devaluation makes a country more attractive to international tourists by making travel cheaper. However, the real-world implications for Ethiopia are more nuanced and complex.

The country is undergoing a testing period marked by significant political and social challenges. Prime Minister Abiy Ahmed’s administration, which is now six years old, has been overshadowed by ethnic conflicts that have plagued various regions over the past four years. Abiy Ahmed, who hails from the Oromo ethnic group, previously led the Oromo People’s Democratic Organization (OPDO), known for its narrow political philosophy.

Upon assuming power, Abiy Ahmed initiated a conflict against the TPLF, a move that significantly disrupted the country’s stability. The conflict, which eventually led to the Pretoria Agreement, was followed by a new wave of unrest in the Amhara region, where the national army was embroiled in a full-scale war.

Many of Ethiopia’s prime tourist destinations are located in the Amhara region. The ongoing conflict and general uncertainty in the country have significantly impacted tourism. Potential travelers are deterred by safety concerns, leading to a sharp decline in ticket sales and visits to Ethiopia.

These challenges collectively impede the economic potential of tourism in Ethiopia. It’s clear that while currency devaluation could theoretically attract more tourists, it’s not enough to counter the negative impact of political instability and conflict. The Ethiopian government’s task is twofold: to restore peace and stability, and to breathe new life into the tourism industry for economic recovery.

 

Inflation and increase costs.

One significant disadvantage of currency devaluation is the potential for inflation, which occurs when the Birr loses its purchasing power, leading to unreasonably high prices for goods and services people cannot afford. Devaluation makes imported goods more expensive, increasing the overall cost of living. For Ethiopia, where many tourism-related services and goods are imported, this can translate into higher prices for hotels, transportation, and other amenities. The elevated costs could negate the initial competitive advantage of a devalued currency, potentially deterring tourists and causing a significant loss of revenue in the tourism sector.

In addition to the tourism sector, the impact of devaluation on essential commodities such as fuel and agricultural products can be severe. For example, higher gas prices can increase transportation and operational costs across various industries, increasing the prices of goods and services. This can create a ripple effect throughout the economy, affecting everything from food distribution to manufacturing.

The agricultural sector, heavily reliant on imports for fertilizers and other inputs, faces challenges. Currency devaluation can lead to significant price increases for these essential farming supplies, pushing them beyond the reach of small-scale farmers. This can result in reduced agricultural productivity, higher food prices, and increased food insecurity.

Moreover, the higher cost of living resulting from inflation can disproportionately affect the poor and vulnerable populations. As the prices of necessities rise, households may struggle to afford essential items, leading to a decline in overall living standards. This can exacerbate poverty and inequality, creating additional social and economic challenges for the country. It is crucial that economic policies not only address the root causes of inflation but also provide support to these vulnerable populations, emphasizing the importance of social responsibility in economic policy.

In summary, while currency devaluation aims to boost export competitiveness, the potential for inflation poses a significant risk to Ethiopia’s economy. Higher prices for imported goods, increased costs for tourism-related services, and the burden on the agricultural sector can negate the benefits of a weaker currency. To mitigate these adverse effects, Ethiopia must implement comprehensive economic policies that address the root causes of inflation and support vulnerable populations.

 

Investment uncertainty

Currency devaluation often signals economic instability, deterring foreign investment in critical infrastructure such as hotels, resorts, and tourism services. Investment is vital for improving and expanding tourist attractions, and with it, the growth and development of the tourism industry can be significantly improved.

The perception of a declining currency value can lead to a loss of confidence among potential investors, resulting in decreased capital flow into the tourism sector. Foreign investors may become wary of the risks associated with investing in an unstable economy, fearing that their returns may be diminished by further devaluation or economic turmoil. This hesitation can reduce the funds available for developing new tourist attractions or upgrading existing facilities, thus stalling the growth of the tourism industry.

Furthermore, a devalued currency can have a direct impact on the operational costs of existing tourism businesses. The increased cost of importing materials and goods for maintenance and expansion can squeeze profit margins, reducing the incentive for businesses to invest in improvements. This can result in a decline in the quality of services and amenities offered to tourists, thereby diminishing the appeal of Ethiopia as a travel destination.

The negative impact on foreign investment is wider than the tourism sector alone. Critical infrastructure projects like transportation networks, communication systems, and utilities may also need reduced investment. These infrastructures are essential for a thriving tourism industry, enhancing accessibility, convenience, and overall visitor experience. With adequate investment, the quality and reliability of these infrastructures may remain high, making Ethiopia less attractive to international tourists.

Furthermore, the lack of foreign investment can lead to a vicious cycle of underdevelopment and reduced tourism revenue. As tourism infrastructure deteriorates or fails to expand, fewer tourists may choose to visit Ethiopia, decreasing tourism-generated income. This, in turn, can limit the government’s ability to invest in necessary infrastructure and services, perpetuating the cycle of economic stagnation and underdevelopment.

In conclusion, the impact of currency devaluation on Ethiopia’s tourism sector is significant. To counter this, a multifaceted approach is needed. Stabilizing the economy, enhancing investor confidence, and implementing policies that support sustainable growth in the tourism industry are all crucial. This comprehensive strategy, which includes political stability, economic reforms, and strategic investments in critical infrastructure, is essential for the growth and development of the tourism industry.

 

Remittance and its effects on the local economy

Before the Abiy Ahmed war began, Ethiopia received over $5 billion in remittances annually from its diaspora communities worldwide. These remittances play a crucial role in the Ethiopian economy by directly contributing to the Gross National Product (GNP) and spending in local markets, stimulating economic activity, and supporting livelihoods.

In stark contrast, the International Monetary Fund (IMF) pledged a $1.5 billion package to Ethiopia, less than a third of the remittance inflows. Unlike remittances, the IMF’s financial assistance comes with conditions that often increase the country’s debt burden and require economic adjustments that may not align with Ethiopia’s immediate needs or long-term development goals.

It’s disheartening to see that successive undemocratic, ethnically based governments in Ethiopia have chosen to rely on external donors like the IMF and other Anglo-American entities. This reliance on external support, which often comes with strings attached, undermines Ethiopia’s sovereignty and stifles its potential for self-driven development and growth. Instead of fostering unity and implementing effective policies that harness the potential of their own resources and people, these governments have opted for external aid. By doing so, they miss opportunities to develop the country sustainably from within.

 

What is to be done?

In conclusion, the resolution to Ethiopia’s current economic and sociopolitical crisis urgently requires the dismantling of the ethnically based political establishment imposed on the Ethiopian people. This establishment, supported by Euro-American powers, is a significant barrier to progress. Peace and stability are essential for any meaningful advancement. The International Monetary Fund’s (IMF) fiscal policies are unworkable and unrealistic in a nation where the government is at war with half of the population. Ethiopia is predominantly an agrarian society, with 80 percent of the population relying on agriculture and a significant portion of farm products coming from the Amhara region. Therefore, implementing fiscal policies before achieving peace and withdrawing military forces from this region is impractical and an empty rhetorical exercise that ignores the reality on the ground.

It is crucial that institutions like the IMF, the World Bank, and Euro-American nations align themselves with the Ethiopian people. They must understand Ethiopia’s unique context before prescribing economic or governance solutions. Their support is vital in efforts to overthrow the ethnically based governance and constitution that have become significant obstacles to economic and political progress and sources of ongoing conflict and instability.

To truly assist Ethiopia, these global institutions and nations should:

• Aid in dismantling the ethnically based political system and the constitution that perpetuates division and conflict.
• Help establish a transitional government with a framework for transitional justice. This interim government should pave the way for radical sociopolitical changes and ensure that justice is served for criminal groups and individuals responsible for the ongoing strife.
• To create a stable environment conducive to effective economic policies, prioritize peace and the withdrawal of military forces from conflicted regions, particularly the Amhara region.
• Understand Ethiopia’s economy’s rural nature and its peasant population’s needs. Economic policies should be designed to support and enhance the agricultural sector, ensuring they are realistic and beneficial to most Ethiopians.
• Promote policies that foster self-reliance and sustainable development, reducing dependency on external aid and enhancing the nation’s ability to utilize its resources for growth.

By addressing these areas, Ethiopia can move towards a more stable and prosperous future where peace and development are achievable goals. This comprehensive approach will enable the country to break free from the cycle of conflict and dependency, ultimately allowing the Ethiopian people to determine their destiny.