Viewpoints | May 21,2022
January 30 , 2022
Economics can be heartless. The field’s obsession with numbers and taking the long-term macro view drives social justice activists crazy. Economists general penchant for models and large data sets drives the political left nuts. This disconnect informs the criticism against GDP as a measure of the wellbeing of a country. Aggregate economic output is considered a crude estimate that disregards essential factors such as freedom and equality.
They are not wrong, especially when it comes to the argument for depreciating a country’s currency. The International Monetary Fund (IMF) has often been criticised for supporting slashing the value of a currency, and removing subsidies, whenever a country is in financial straits. Combined with prescriptions like higher borrowing costs, such monetary policy will make households poorer while also curbing economic growth.
The problem is that when a country is in deep debt, there are not many alternatives to address fundamental macroeconomic failures other than depreciating the currency. It is this or hoping for debt moratorium or relief, and this does not come about that often. Ethiopia’s government finds itself in a similar situation, and it could be following a time-tested antidote to make it easier to pay off its debt.
This is how there is a tradeoff between the value of a currency and debt obligations. It may seem counterintuitive since foreign currency-denominated debts will become more expensive the more the Birr is depreciated.
Consider this. Say the federal government needs two billion dollars to cover expenditures for 2022. It has two alternative sources of credit. One is foreign creditors and the other is selling treasury bonds, the latter of which is becoming increasingly popular. It manages to secure one billion dollars in loans from bilateral and multilateral partners. The government borrows the rest from domestic creditors – mostly banks and insurance firms – by selling treasury bonds denominated in Birr (only domestic institutions would be interested in holding debt denominated in such an obscure currency). The government will owe 50 billion Birr to its domestic bondholders at current exchange rates.
Let us assume that interest rates do not apply (which is not unprecedented since borrowing costs have been very low in the developed world). The government also has to settle the entirety of the principal in 2023.
A year later, the debt is due and creditors are knocking on the door. Unfortunately, the government may not have two billion dollars in its treasury at the moment. It scrapes the bottom of the barrel and all it could come up with is 1.5 billion dollars, not enough to cover its debt obligations.
What should it do?
Debt can be restructured, but creditors rarely agree to this. The government could also default but this is a big no-no. Even absolute monarchs knew this was a bad idea. It is not just the fictional Lannisters that have to pay back their debts. But, based on the currency composition of the debt, a country can use its monetary sovereignty over its currency to make payment possible.
There is not much that could be done about the one billion dollars owed to foreign creditors as the government has no power over a dollar, a euro or a renminbi. It has to be paid back in full. The federal government will have 500 million dollars left in its coffers, which amounts to 25 billion Br at 2022 exchange rates. By halving the value of the Ethiopian currency (not that far removed from reality as the Birr has depreciated by a quarter since last year), the half a billion dollars in the fed’s treasury all of a sudden translates to 50 billion Br – the total amount it owes domestic creditors. This way, the government technically pays back its debt and appears creditworthy and the banks that are owed the sum will not be at risk of insolvency.
There is a price nonetheless. Foreign creditors are paid back at the expense of ordinary people - one of the main criticisms against the IMF as it is seen to prioritise Western creditors. Savings will have been halved in value over a year. Anyone with liquid assets as a more significant share of their net worth will lose a large portion of their wealth. It is perhaps the best argument against why the economy should not be left wholly to economists.
PUBLISHED ON Jan 30,2022 [ VOL 22 , NO 1135]
Viewpoints | May 21,2022
Sunday with Eden | May 23,2021
Viewpoints | May 23,2021
Verbatim | Dec 19,2021
Editorial | Sep 26,2021
Agenda | Apr 02,2022
Radar | Mar 27,2021
My Opinion | Nov 21,2018
Fortune News | Jul 11,2021
Radar | Jun 21,2021
Photo Gallery | 53172 Views | May 06,2019
Fortune News | 46026 Views | Jul 18,2020
Photo Gallery | 44932 Views | Apr 26,2019
Fortune News | 44793 Views | Sep 01,2021
Commentaries | Jul 02,2022
Life Matters | Jul 02,2022
My Opinion | Jul 02,2022
Sunday with Eden | Jul 02,2022
Agenda | Jul 02,2022
Editorial | Jul 02,2022
July 2 , 2022 . By RUTH TAYE
On a rainy afternoon last week, a coffee processing facility in the capital's Akaki-Qality District was abuzz with activ...
November 27 , 2021
Against my will, I have witnessed the most terrible defeat of reason and the most sa...
November 13 , 2021
Plans and reality do not always gel. They rarely do in a fast-moving world. Every act...
October 16 , 2021 . By HAWI DADHI
Residing in a country with no capital market, an organised marketplace for trading se...
The pandemic, armed conflicts and natural disasters have again brought the importance...
Leaders of the National Election Board are in a charm offensive mood, of a sort. Last week, they organised a rare tour for members of the me...
When the country’s most senior diplomats and envoys return back to their posts after two-week debriefings, they leave behind a point or tw...
July 2 , 2022
After nearly two years since the civil war broke out in northern Ethiopia, adversarie...
June 25 , 2022
It is not the best of times to be in charge of governance in Ethiopia, whether at the...
June 18 , 2022
Some of Ethiopia's economic policymakers may take solace from realising that inflatio...
June 11 , 2022
The stereotype many people have of parliamentarians is as clueless seat fillers who exist to rubber stamp legislative bi...
PM Abiy Ahmed (PhD) at a Gala Dinner Called for the Awarding of the Félix Houphouët-Boigny Peace Prize
May 6 , 2019
A couple of years ago, I was having a conversation with a friend and mentor who has...
The advertising industry in Ethiopia has come a long way. They are not only getting better and more creat...
In an economy that has slowed, where consumers are hammered by inflation, and the private sector is teetering on edge, one industry has a br...
July 2 , 2022 . By TSION HAILEMICHAEL
Getu Gelete has struck a deal to acquire a 40pc stake in Habesha Cement S.C., buying out Pretoria Portlan...
July 2 , 2022 . By BERSABEH GEBRE
Lake Ayalew, minister of Revenues, moved to address complaints about inflationary distortions on capital...
July 2 , 2022 . By BERSABEH GEBRE
The federal government is set to roll out a single-account treasury system for the coming budget year, co...
Or see contact page