Ethiopia’s Basic Problem, The Exchange Rate Is Too High – So Float it

We could say a lot of things abut the economy of Ethiopia – it takes time to recover from the imposition of idiot socialism for example. But even the most cursory of looks at these numbers will tell us what a basic problem is, the foreign exchange rate is too high. Thus the obvious solution – free the birr and see that problem disappear overnight.

As we’ve pointed out before there are all sorts of problems from getting this one price in the economy wrong:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] It’s worth noting that an exchange rate which is too high – which is what that official rate is – is an artificial subsidy towards imports and away from domestic production. It also hampers exports as well. Neither really being what a developing country like Ethiopia should be trying to do, dissuading exports and encouraging imports. It would be far better to simply have no such regulations about foreign exchange. Those who wish to exchange may do so as they wish and at whatever price they wish. At least if that were true we’d know that the price actually is balancing supply and demand, the first step to rational economic decisions. [/perfectpullquote]

So, what do we find in the latest trade figures?

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Lack of inputs for the manufacturing companies, which often couldn’t get the hard currency on time is also mentioned as failure of the emerging manufacturing sector of Ethiopia to generate export earnings. While Ethiopia’s export income has been declining, on the contrary the country’s spending for import has been growing surpassing $17 billion last. As a result, the growing trade deficit, Ethiopia has been facing acute shortage of foreign currency to import medicines and fuel, among others. [/perfectpullquote]

Imports rise with an overvalued exchange rate, exports fall. What are we seeing? Rising imports and falling exports. We can thus – and should – conclude that the exchange rate is too high. Thus, free the foreign exchange market and find that correct level.