Successful Launch Of The EUBFE

Ethiopian Finance Minister, Ahmed Shide held talks today with EUBFE delegation led by the Cooperation Head for EU Delegation to Ethiopia, Erik Habers, on ways of strengthening financial and economic cooperation between the two sides.
During the meeting, the two sides are ready to work for a favorable investment climate in Ethiopia through the joint forum.
EUBFE representatives have also pledged to help Ethiopia to become an ideal investment destination and regular talks will be held with the Ministry of Finance to achieve this goal.
Finance Minister Ahmed Shide said on his part Ethiopia attaches great importance to its cooperation with the European Union and other European countries.
He further stated that Ethiopia is committed to working closely with the EUBFE and having a consultative meeting at least twice a year for the benefit of both parties.
Speaking on the ongoing economic reform that Ethiopia has embarked on, Ahmed noted that the reforms are being intensified and the government is committed to increasing the participation of the private sector in the reform process.
He stated the recent involvement of private sectors as well as foreign companies with strong experience and potential in the telecom sector of the country as a showcase of the government’s commitment in this regard.
The Minister told the delegates that essential efforts will be made by the Ministry of Finance to ease all forms of bottlenecks that faced EUBFE member companies in their day-to-day activities in Ethiopia.
EU Business Forum in Ethiopia together with the EU Delegation in Ethiopia held discussion on March 26, 2019 with the Ethiopian Investment Commission (EIC) on improving the existing platform of dialogue with EU businesses in Ethiopia. EUBFE members were honored with the presence of HE Abebe Abebayehu, Commissioner of Ethiopian Investment Commission and HE Ambassador Johan Borgstam, Head of the EU Delegation to Ethiopia.
In the discussion that ensued, EU business leaders in attendance expressed their appreciation for the commitment shown by the EIC in facilitating dialogue with government agencies in previous instance through the Public-Private-Dialogue (PPD) platform. They further expressed their desire to continue in this vein and contribute in the reformulation of investment code as well as the second version of PPD. The guest of honor at the breakfast meeting, HE Abebe Abebayehu, highlighted previous successes close collaboration between businesses have brought and vowed to improve on disruptions on the regularity of such engagements. The delayed PPD-2, he also indicated, will go through at the earliest opportunity. HE Johan Borgstam, in his concluding remark indicated that it is important for businesses to closely work with regulators while also highlighting EU Delegation's contribution to improving the business environment in Ethiopia, including the automated customs system currently operational.
The meeting cocluded with a joint committment to continue to build on the on-going constructive dialogue.
EUBFE took part in security briefing in connection with the national elections along side its member bilateral associations-the CAFE and ENLBA, as well as other prominent FDI associations. The briefing was led by Mrs. Frealem Shibabaw, state minister of law enforcement at MoF, Commissioner of EIC Ms Lelise Neme and Deputy Commissioner of EIC Temesgen Tilahun.
MoP briefed investors on the general preparation on security pre and post election. Following this session, dedicated emergency contact numbers were disseminated via EUBFE to all members to report any incidents they deem unsafe.
The euro was worth 6.94 birr in October 2000, and then peaked in April 2014 at 27 birr before falling to 21.93 in March 2015.During the fifteen-year period economic fundamentals were as follows:
Early 2000, Ethiopia’s external debt was unsustainable. Debt forgiveness/rescheduling in 2000-2008 and 2010 – plus substantial external aid – have brought indebtedness to a manageable level. In 2014, the debt to GDP ratio was a healthy 22.6% (est.), but is now increasing due to public sector investment expenditure. External debt as a percentage of exports and primary income looks less healthy as export performance remains unsatisfactory.
If the inflation differential between Ethiopia and Euro zone turns out 8.5% in 2015, then the exchange rate recorded in Q1-2015 means a 25% real exchange rate appreciation of the BIRR against the Euro compared to 2014. Unrealistic, considering Ethiopia’s CA deficit – even when corrected for FDI inflows – while the Euro zone CA may top €200 billion surplus in 2015. Finally, the forex reserves exceeded 3-month worth of imports in 2002-03; reserves are currently about 2 months only. Foreign currency shortage is a recurrent problem in Ethiopia explaining the existence of a parallel market and rationing of foreign exchange. Of course, the issue of devaluation is sensitive because devaluation produces winners and losers. But, what devaluation seeks to achieve is a change in the relative price of exportable goods (vis-à-vis non-tradables) resulting hopefully in a boost of export performance, and, a disincentive to imports (thus a strategy of efficient import substitution).
EXCHANGE RATE REGIMES
The choice of an exchange rate regime is important for competitiveness, macroeconomic stability and growth. Exchange Rate regimes are classified as fixed exchange rate, fully floating market-determined exchange rate or intermediate regimes. Ethiopian authorities describe their Exchange Rate regime as a managed float (= intermediate regime) with no predetermined path for the exchange rate.
Before an auction system was established in 1992/93, the BIRR was pegged to the USD at 2.07 BIRR. An inter-bank foreign exchangemarket was created in October 2001 with the National Bank of Ethiopia intervening.
Historically, depreciation pressures on the BIRR have prevailed. While the USD-BIRR rate stands around 20.5 in May 2015, the IMF (Oct. 2014) estimated the Real Effective Exchange Rate overvaluation in the range of 10-13%. The “authorities acknowledge that a competitive exchange rate is important but consider too rapid adjustment to be counterproductive due to feedback effects on inflation”.
Under Ethiopia’s regime:
MONETARY POLICY
The NBE aims to maintain sufficient international reserves to cover (a) payments for immediate and short term imports of commodities and services into Ethiopia, (b) foreign debt payment commitments. When reserves decline, the Governor considers remedial measures and may suspend issuance of foreign exchange permits.
The bank carries out monetary management with a mix of policy instruments: sale/ purchase of securities issued by Government, a central bank credit facility to cover commercial banks’ short-term need, reserve requirements, setting floor deposit interest rate, use of credit control and moral suasion.
The Monetary Policy Committee of the NBE reviews quarterly the economic developments and proposes a monetary policy stance to theBoard of Directors in line with targets for inflation, growth rates of monetary aggregates, GDP growth rate, the real equilibrium exchange rate and the foreign exchange reserve.
The NBE is the biggest generator of foreign currency and enables it to intervene as the major market player, assuring exchange rate stability to some degree.
The dilemma of any policy decision maker is to achieve x targets with y instruments. If the number of targets exceeds the number of instruments available, then meeting the targets would be a matter of pure coincidence. Even if the number of Central Bank’s policy instruments exceeds the number of targets, it is not certain that the CB will be able to meet trend targets as it has limited or no influence on productivity growth, investments and external demand. Therefore, it may miss one or several targets. The question is which ones shall be sacrificed?
IMPACT OF DEVALUATION
Economists focusing on economic fundamentals as drivers of exchange rate movements look at:
Speculative attacks do occur resulting in ER movements not in line with fundamentals.
From the observation of two experiences with devaluation (Franc CFA in 1994 and 1997 Asian financial crises) we have learnt that:
true that domestic price increase erodes the initial positive impact on price competitiveness, but this is a process takes up to ten years in most cases.
The difficulty of CFA economies to maintain high economic growth under conditions of sustainability, following currency devaluation, is linked to a structural issue. For an economy to be able to increase export supply and to substitute for imports, its industry must be sufficiently diversified. One expects the supply response to be stronger the larger the manufacturing base of the economy. This was the case in Asia. Ethiopia’s economy is notoriously undiversified.
In conclusion, currency realignment can work. If the objective behind a devaluation strategy is to restore price competitiveness, then the devaluation basically BUYS YOU TIME to develop intrinsic competitiveness in your tradables sectors. Competitiveness requires business upgrading to boost productivity, product/services innovation and market diversification. These are processes which cannot be changed overnight.