Why do the new NBE franco valuta directive will have zero impact to tame the galloping inflation in Ethiopia

Micro-blog by Netsaalem Bahiru

Inflation in Ethiopia as of March 2022 stands as 34.5%.

Why I think that allowing Ethiopian diaspora to import few consumer goods through franco valuta would not work.

First some facts regarding our economy

- Inflation is at 35% or more

- We are running negative real interest rate (-28%). Huge purchasing power loss on saving & income

- Better than $12B trade deficit (we import 3x more than we export)

- Shrinking economic growth due to war & drought

- Chronic shortage of foreign currency

- We don't produce enough food

- High youth unemployment

-  Very low capital, land & labor productivity

- Ranked low in ease of doing business index

- No proactive (but reactive) economic policies

 I can go on & on about the struggle of the economy but let me stop here.

Our economy with regard to international trade

- The top five destinations for our exports in 2019 were China (13%), the US (9.6%), Saudi Arabia (8%), Germany (5.9%) and UAE (5.5%)

- By region, our exports comprised of Asia (52%), Europe (24%), Africa (13%), & Americas (11%)

- Our imports come from Asia (67%) followed by Europe (17%), the United States (9.3%), and other countries in Africa (8.1%).

-  Imports from China accounted for 26% of Ethiopia’s total foreign supplies.

The key features of our financial system

- We have birr non-convertible currency (blocked-currency) that is fiat just used for domestic transactions

- Our financial system is closed to international players. Means our foreign currencies reserve come only from export, FDI, aid, remittance & loan.

Our economy and global geopolitical dynamics

- The Russian-Ukraine was changing the world order and economic dynamics

- As US continued to heavily use US dollar as a sanction tool, Many countries started/thinking to de-dollarizing & diversifying their exposure to US dollar.

- Major countries started signing currency swap deals to bypass the US dollar

- Chinese renminbi (Yuan) is gaining fast traction as global reserve currency

- With all changing global order, we don't seem to factor these dynamics in our policy decisions b/c our mantra is Home Grown Economic Reform.

Now, knowing the above basic but major facts how ready is our economy to absorb shocks and stresses?

My answer to my own question is we are NOT ready to deal with any shocks and stresses. I honestly think that our politicians even denying that our economy is heading south & we're in uncharted territory.

Policymakers: apart from random actions what's their policy options to bring the economy back on track? What's in their toolbox? Not sure if they have one. I am being honest.

Here are major policy change they many need to consider to prevent the ship from hitting the iceberg.

The first and major step is to end the war and conflicts brewing everywhere. As things stand, we even can't afford peace let alone war.

Then use the real brainpower of experts to develop a comprehensive economic policy & strategy that's adaptive to the changing world order.

In my personal perspective: these are the major things that they may need to add in their policy toolbox to grow the economy in the long-run.

1) Prepare strategy to open the financial system gradually. This dramatically changes investors perspective & confidence to invest in our country.

2) Think about convertibility of Ethiopia birr- at least with our trading partners. At least sign currency swap deal or bilateral trade deals to trade with our own currencies with countries we are trading with such as China, UAE, African countries.

3) You can't keep printing birr and drive hyperinflation. STOP printing birr.

4) Think outside of the box- instead of asking the diaspora to import oil and food items through franco valuta; they can for example introduce investment-grade diaspora bond that is backed by gold (we mine gold, right?) With reasonable interest rate to increase forex?

5) Our economy is hugely tied to LAND (Elephant in the room). What's the long term strategy to privatize land? Unless we stop using land as political tool our suffering and poverty won't end. Using land as economic tool however addresses many of our political and economic problems.

6) For stable economy strong institutional independence is important. So, make National Bank of Ethiopia to be independent & proactively act when the key macroeconomic indicators change. The main role of the NBE suppose to be bringing inflation under control and maintain macroeconomic balance. Let them do that.

7) Make the business enabling environment easy so that we can increase our PRODUCTION CAPACITY.

Without increasing our production capacity let's not even think about our future.

This requires revising many of outdated policies such as tax & tariff and invest in e-goverment.

In immediate-term the following actions may play role to stabilize the economy

8) Stop devaluating birr & start appreciating it- we're net importers. This cliche devaluation will increase export won't work for countries like ours that export primary goods & import industrial goods.

9) Revisit public funded projects. Pause on projects that are wasteful and stop spending on non-economic projects (at this time I will rather build more factories over cultural centers &public parks)

10) As we allow birr to appreciate, give major salary raise to public servants.

There are many more options as economic measures that we can take. Introducing new majors are not easy. Some of the measures may cause temporary disruptions and pain. For long term gains we should prepare to bear some of the pains.

The question is are we ready for change?

End/

Data source: ITA

Netsaalem Bahiru is an economist and the view expressed in this micro-blog is my personal views and doesn't represent the view of MNM Global Partners and companies and organizations I work with.

Follow Netsaalem on Twitter @getfreeworld