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What Does Ethiopia’s Currency Devaluation Mean?

What does Ethiopia’s currency devaluation1 mean? In the short term it certainly means that every Ethiopian (at least those that hold their savings in Birr) is about to become poorer. Of course, in real terms the change will be minimal because of the large population that relies already on free handouts. This change will of course affect disproportionately the middle income and rich residents as they will have to pay more for their imported goods (given that they are already not paying for these goods in a foreign currency).

Of course as the poor rely on aid from foreign governments, this change will have an impact that is less dramatic on them (as their food is already paid in a foreign currency). Of course if this policy change promotes a domestic production sector then the impact will be large and positive because it will reach down into the subsistence farmer classes and have them enter the general labor market as opportunity increases in the manufacturing sector. In reality however there are many variables standing in the way of this positive change. These include, but are not limited to:

  • continued aid dependency (distorting the market)
  • poor infrastructure inhibiting movement
  • insurgency

All of these issues will make the likelihood of strong economic development resulting from this change in economic policy less likely.

Of course if this change in economic policy by the Central Bank does promote consumption internally it could enable local producers to under cut their foreign competitors and reap the benefits. For this to happen though there would have to be a significant change in Ethiopia’s half-century old aid economy. This aid-based economy has grossly distorted the price incentive structure in Ethiopia and because it is based on non-economic (particularly extra-national political) motivations, its product is not necessarily to have a positive economic impact.

Finally, the poor infrastructure investment policy in Ethiopia today (and in the past) has caused a bifurcation between the rural and urban populations. Of course this has existed in every modern society (and continues) however, in the successful societies the rural populations are pulled forward with the rising tide, while in Ethiopia they are completely ignored.

Although this revaluation of the Ethiopian Birr is a good change, it must be followed by other positive changes to affect the larger situation instead of making the average resident simply 17% poorer in real terms.

  1. Ethiopian Central Bank Says Devaluation to Boost Exports, Domestic Output 

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