Featured | Sep 29,2024
Aug 3 , 2024
By Mushe Semu
The recent macroeconomic overhaul in a country experiencing economic development and diplomatic pressure has ignited a firestorm of controversy. Advocates argue that the policy could usher in growth and development, while critics caution against possible serious pitfalls. Given the high stakes, it is crucial to unpack the potential implications for Ethiopia's economy and its citizens.
The government lauds the proposed policy's merits, yet critics note a lack of thorough consideration of potential downsides. They warn that any policy enacted by executive order could ricochet, fueling chronic economic instability, a predicament that requires a careful evaluation of near-term effects.
The International Monetary Fund (IMF), in its research published in "Financial Development," warns that while floating exchange rates may address overvaluation risks, they do not necessarily guarantee low inflation, diminished volatility, or enhanced trade integration, compared with fixed exchange-rate regimes.
Comparative analysis reveals a mixed bag. Context is king, as each country’s unique economic milieu has influenced the outcomes.
Countries like Spain, Greece, Iceland, and Poland have had inconsistent results with floating exchange rates. China's strategic approach of managing an exchange rate to boost exports is evident in the notion that prudent management, not full-blown liberalisation, can produce higher economic results.
A case in point is Singapore, a country with a positive trade balance, that has chosen a managed floating policy, facilitating regulated fluctuation within stipulated limits.
In contrast, Ethiopia’s considerable trade deficit demands a more cautious approach.
Despite the potential benefit of exchange rate liberalisation, Ethiopia’s complexities demand careful consideration of associated risks. A completely liberalised exchange rate could trigger uncertain economic outcomes, with considerable risks of inflation bursts, currency value instability, and a hit to overall economic productivity.
For a country like Ethiopia, struggling with high demand and supply shortages, a system based on a free-floating exchange rate could invite erratic currency fluctuations. This unpredictability could make it harder to forecast economic trajectory, thereby pouring cold water on investor confidence.
Another looming concern should be Ethiopia's depleted foreign currency reserves. Leaning heavily on market forces to determine exchange rates could further destabilise prices and pose formidable economic challenges.
Devaluation of the Birr could drive up the cost of imports, including essential services and goods. This could fan the flames of inflation, impacting the cost of living and potentially fueling social unrest. Ethiopia's economic productivity is already under duress due to ongoing conflicts that impact exports and overall economic stability. An unrestrained floating exchange rate could potentially exacerbate these issues rather than remedy them.
Policies should strike a balance between short-term pressures and long-term stability, keeping the average Ethiopian economic welfare front and centre. Comprehensive strategies encompassing managed exchange rates and targeted economic reforms could be the key to unlocking sustainable development in Ethiopia.
PUBLISHED ON
Aug 03,2024 [ VOL
25 , NO
1266]
Featured | Sep 29,2024
Commentaries | Aug 21,2021
Fortune News | Feb 27,2021
Agenda | Oct 24,2020
Viewpoints | Apr 22,2023
Life Matters | Apr 08,2023
Radar | Oct 16,2021
Radar | May 16,2020
Fortune News | May 08,2021
Radar | Jan 27,2024
My Opinion | 127547 Views | Aug 14,2021
My Opinion | 123724 Views | Aug 21,2021
My Opinion | 121873 Views | Sep 10,2021
My Opinion | 119733 Views | Aug 07,2021
Dec 22 , 2024 . By TIZITA SHEWAFERAW
Charged with transforming colossal state-owned enterprises into modern and competitiv...
Aug 18 , 2024 . By AKSAH ITALO
Although predictable Yonas Zerihun's job in the ride-hailing service is not immune to...
Jul 28 , 2024 . By TIZITA SHEWAFERAW
Unhabitual, perhaps too many, Samuel Gebreyohannes, 38, used to occasionally enjoy a couple of beers at breakfast. However, he recently swit...
Jul 13 , 2024 . By AKSAH ITALO
Investors who rely on tractors, trucks, and field vehicles for commuting, transporting commodities, and f...
Apr 13 , 2025
The federal government will soon require one year of national service from university...
Apr 6 , 2025
Last week, the International Finance Corporation (IFC), part of the World Bank Group...
Mar 30 , 2025
When the private satellite channel, Ethiopian Broadcasting Service (EBS), aired an em...
Mar 23 , 2025
Getachew Redda, head of the Tigray Interim Regional Administration (TIRA), at least u...
Apr 13 , 2025
Some parts of Merkato have fallen uncharacteristically silent, contrary to its typical bustle of traders, shoppers, and hawkers vying for bu...
Apr 13 , 2025 . By AKSAH ITALO
Takeaways: Retroactive VAT enforcement on soybean cake has become a tax flashpo...
Apr 13 , 2025 . By BEZAWIT HULUAGER
A redevelopment initiative along Africa Avenue (Bole Road) has set off alarm bells for property owners wh...
Key Takeaways Federal legislators called for reforms and increased enforcement to protect Ethiopian...
Loading your updates...