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Ethiopian Economics Association warns of pressure on FDI

Ethiopia’s entry into BRICS may trigger detrimental retaliatory measures on the side of Western governments and development partners, warn the findings of a recent study by the Ethiopian Economics Association.

The Association’s experts caution the West could potentially block or minimize the disbursement of new loans and grants, while the World Bank Group and the World Bank Group (WBG) and International Monetary Fund (IMF) will likely mount pressure on the government to devalue the Birr.

Substantial political measures and pressure on FDI are also expected, according to the working study titled ‘Does Ethiopia Benefit from joining BRICS? Global Trends and Local Perception.’

A survey conducted by the Association shows economists are split on their predictions between those who forecast Ethiopia will gain economic benefit from joining the economic bloc, and those who suspect the move’s political costs will outweigh its fruits.

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Close to three quarters of the 233 economists who participated in the survey predict Ethiopia will face retaliation from the West for joining the emerging bloc.

Despite reservations on the opaqueness of the criteria under which Ethiopia was invited to join BRICS, and recognition of the potential for political, diplomatic, economic, and financial repercussions, economists generally support the move.

One of the study’s main talking points is the potential benefits of the BRICS de-dollarization efforts headed by the New Development Bank (NDB).

Headquartered in Shanghai, the NDB is a multilateral bank established by BRICS a decade ago. It operates with USD 50 billion in subscribed capital.

The NDB is running a three-year de-dollarization initiative to switch away from the US dollar, and the study indicates it could be a source of development finance.

Although there is no clear understanding on whether the NDB will be able to realize its de-dollarization initiative, the majority of survey respondents concurred with the initiative. Forecasted timelines for de-dollarization vary between five and 15 or more years.

“Ethiopia is suffering from serious forex constraints. Acceptance of its local currency (ETB) by member states in the bloc is also unlikely. Ethiopia is not in a position to benefit from international trade with local currencies for the fact that trading with local currencies aggravates the existing forex constraints and constrains trade with other partners using the USD,” reads the study.

A flawed implementation of the New International Economic Order (NIEO) calls for the need to identify and join new and alternative economic blocs. Failure to commit to significant reforms on the part of the WBG and the IMF makes it more likely for nations with a common agenda to establish economic blocs to ensure the realization of their development objectives.

Ethiopia should conduct a rigorous investigation of the potential economic and political effects of joining BRICS before making the final decision on how to proceed with the bloc and western powers, recommended the study.

The Association’s experts want to see Ethiopia work with both BRICS and the West, at least for the short run. Experts have also expressed a lack of confidence in the IMF, World Bank, and other western international financial institutions (IFIs). They urge for a reform of IFIs.

“Due to its poor achievement of predefined objectives, the NBE is given low institutional trust and value. Ethiopia is required to take relevant reform and policy measures and create a vibrant banking system and financial markets comparable to that of member states in the BRICS,” reads the study.

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