Trade & Monetary Policy Management: Does it have anything to do with Citizens’ Livelihoods in Ethiopia?

Trade & Monetary Policy Management:

Does it have anything to do with Citizens’ Livelihoods in Ethiopia?

Public Lecture - Respublica Literaria XCXIV, MMXV

Costantinos Berhutesfa Costantinos, PhD

President, Ethiopian Management Professional’s Association

Professor of Public Policy, School of Graduate Studies,

College of Business and Economics, AAU

Abstract

      In its third economic update, the World Bank Group identifies opportunities and challenges to help Ethiopia tap into its significant export potential and further transform its economy - to boost exports. Its recommendations hinge on “More than ‘what’ is being exported; it is the ‘how’ that is hindering exports. In this connection, the lecture raises the issues of why the state is devaluing the currency so dramatically, at an inflated cost to consumers on virtually all imported products – petroleum, wheat, edible oil, fertilizer, beer malt, soft drinks, clothing, etc. The surprise 22% devaluation of the birr on August 31, 2010 and the 5% annual devaluation is recognition that its policy setting had been a factor in inhibiting Ethiopia’s external performance. However, by itself, this move falls short of addressing the problem, which reflects numerous and complex factors. Given the role that the exchange rate peg had played in promoting domestic price stability, such devaluations leave open the question of the strategy to maintain macroeconomic stability, while it seeks to boost export performance. Moreover, it is not out of the question that the devaluation alone might prove to be disappointing in terms of its impact on trade performance.

     In the very short term, due to a “J-curve” response whereby the trade balance initially deteriorates as import costs are driven up while the export response is slow to take effect. In the medium-term, it depends on the response of imports and exports to the lower cost of goods relative to imports. Where products and services (even basic) are almost solely dependent on import, this policy simply aggravates inflation putting the life of poor in danger as there is no bulk for supply (export), there is no enough (basic goods) for domestic consumption. Policies should target on boosting production before resorting to export promotion (and discouraging import). Accordingly, a more comprehensive policy response, sustained over the medium term, is required to redress a situation generated by years of policy settings inimical to good export performance. Progress on the priority areas outlined in the lecture is the key to achieving the transformational goals of the GTP—even if the ambitious growth targets were not met, success on the transformational element would be a great accomplishment.

Key words: exchange rate, trade, devaluation, J-curve, imports and exports

See lecture here