World Bank Asks Ethiopia To Devalue Its Currency To Boost Exports

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Written by Kevin Mwanza

The World Bank has asked Ethiopia to consider devaluing its local currency in order to boost its exports, which are mostly unprocessed products that need to stay competitive on price, arguing that such a move will lead to higher economic growth for the horn of Africa country.

Ethiopia, which mainly exports coffee, horticultural products, oilseeds and livestock, has operated a carefully managed exchange rate since 1992, Reuters reported.

Bloomberg said Ethiopia’s exports had steadied at about $3 billion in the past two years, after growing at an impressive 20 percent rate in previous years, due to falling international commodity prices.

“By one measure of real exchange rate, Ethiopia’s currency is 31 percent overvalued,” the World Bank’s lead economist in Ethiopia, Lars Christian Moller, told a press briefing in Addis Ababa. “The bottom line is that Ethiopia competes on prices and the real exchange rate is overvalued,” he said.

Moller said devaluing the currency by 10 percent could increase export growth by 5 percentage points a year.

The Horn of Africa country’s exports rose to $2.6 billion in the first 10 months of 2013/2014, an increase of almost $5 million over revenue earned through all of 2012/2013. But earnings from coffee, the country’s main commodity export, tumbled to about $489 million during the period, less than half of the government’s target.

Economic growth winning streak

Ethiopia, the world’s most populous landlocked nation, has had one of the best economic performance in Africa in recent years, reporting double-digit growth for nearly a decade. The country’s growth has however edged down but the International Monetary Fund (IMF) forecasts a 8-8.5 percent rise in the next two years.

The country also still has one of the heaviest presence of government in business, which the World Bank says need to be loosened to avoid crowding out private investors and hurting growth prospects in the future.

Bloomberg reported that the World Bank also recommended that Ethiopia, which earn most of its foreign exchange from state-owned Ethiopian Airways, should focus more on adding value to commodity exports by expanding processing and packaging, building industrial zones, opening access to credit for small- and medium-size enterprises, and improving costly and time-consuming trade logistics.

Ethiopia is investing to tackle infrastructure bottlenecks such as power and transport networks that have been a barrier to growth, which should help the business climate, Ahmed said.

The World Bank estimates Ethiopia could earn $1 billion a year from exporting electricity by 2023 if all of its hydroelectric projects are completed as planned, Moller said.