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.
Or Escape 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?
Or Run Away 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?
Or Run Away 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?
Or Run Away 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?
Or Run Away 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.
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