Birr gaining strength as dollar poured into Ethiopia

After a downward spiral over the past few years, Ethiopia’s currency, the birr, is now rebounding. A few weeks ago, $1 USD was fetching 37 birr in the black market. The official (artificial) rate remains 27 birr. This week, the black market rate (which reflects the real value) went down to 31 birr per 1 USD as dollar poured into the country due to Prime Minister Abiy Ahmed’s reform agenda that he has introduced when he came to power 4 months ago.

The government continues to face a severe shortage of foreign currency mainly because the country’s treasury has been looted by government officials and their partners in the private sector. Last week, former deputy director of Ethiopia’s Information Network Security Agency (INSA), Binyam Tewolde, was arrested after being suspected of a massive embezzlement scheme. He is the tip of the iceberg. Ethiopia’s depleted hard currency reserve and many of Addis Ababa’s highrise buildings stand as testament to the level of thievery on the part of Ethiopia’s ruling party and government officials over the past 27 years.

The government can restore its hard currency reserve quicker by further devaluating the birr, instead of going after the black market traders, which is a waste of government resources. Applying supply-side economics, the government can put the foreign currency black market out of business by increasing the official exchange rate to 29 or 30 birr per 1 dollar and make more hard currency accessible to importers. The government needs to also come up with a concrete plan to float the birr in the near future.

PM Abiy has been consistently talking about the need to increase export. Devaluation of the birr is the quickest way of doing that. The government’s concern over inflation is understandable, but it does not make economic sense. Inflation that occurs due to devaluation can be offset by increased economic activities in the export and private sector.

Confidence in Ethiopia’s financial sector is growing as the political climate improves, foreign direct investment (FDI), and remittances by Ethiopians in the Diaspora are increasing. But the government can expedite Ethiopia’s economic growth at a lightning speed by fully unentangling itself from its socialist economic policies that benefit only a few elites in the ruling class. Devaluating the birr is one of the quickest ways of not only increasing the country’s hard currency reserve, but also fueling private sector economic activities.