The dilemma of exchange rate devaluation arrangements as solution for inclusion

By:-Eyasu Solomon
Exchange rate Volatility is a measure of risk, whether in asset pricing, portfolio optimisation, option pricing, or risk management, and presents a careful example of risk measurement, which could be the input to a variety of economic decisions. What was surprising and interesting about Ethiopia's move is that the devaluation was not undertaken under the usual duress of “macroeconomic adjustment.” Devaluation helps because it increases exports and reduces imports, thereby increasing the foreign exchange position; and it also reduces domestic spending and brings it more in line with a country’s production.In this instance, however, the devaluation seems to target structural change, to boost the tradable sector so that it can provide the basis for long run growth. Volatility of exchange rates describes uncertainty in international transactions both in goods and in financial assets. Exchange rates are modeled as forward-looking relative asset prices that reflect unanticipated change in relative demand and supply of domestic and foreign currencies, so exchange rate volatility reflects agents’ expectations of changes in determinants of money supplies, interest rates and incomes. I see it differently. Tradable sectors and exports can indeed be key for development. And Africa’s tradable sectors are handicapped by aid and natural resource revenues, which tend to promote non-tradable sectors and encourage consumption over production As Ethiopia considering implementing changes in their development strategies, now is an opportune time to investigate the issue of weather alteration, in exchange rate arrangement have an effect on economic growth or to what extent exchange rate volatility may be responsible for variation in the rate of economic production. Because such moves are accompanied by increase in the volatility of both, nominal and real exchange rates. So, three slightly different takes on this Ethiopian move would be the following. First, this devaluation can be seen—not as actively favoring or even subsidizing some sectors as it would be in the case of China, for example—but as offsetting a previous distortion (aid and resource revenues). Second, instead of viewing this as creating investor uncertainty, it can perhaps be seen as a credible and durable pre-commitment to promoting structural change (provided of course future actions are consistent with this move). The private sector can be assured that there would be durable advantage in investing in the tradable sector. Finally, the devaluation is heartening if it reflects a realization on the part of African policy-makers that the key to development is structural change but one that is brought about in a market-friendly manner rather than in the dirigiste manner of the past.
Real exchange rate uncertainty can have negative effects on both domestic and foreign investment decisions. It causes reallocation of resources among the sectors and countries, between exports and imports and creates an uncertain environment for investment. The most important reasons for a devaluation to trigger an aggregate demand contraction include: a redistribution of income towards those with high marginal propensity to save, a fall in investment, an increased debt burden, reduction in real wealth, a low government marginal propensity to spend out of tax revenue, real income declines under an initial trade deficit, increased interest rates, and increased foreign profits On the other hand, aggregate supply may suffer after devaluation because of more expensive imported production inputs, wage indexation programmes, costlier working capital. Frequent devaluation stimulates speculation, leading to confidence erosion.Such
practice of continuous devaluation not only result in distortions in income, consumption, industrial growth and public finance, but also disturb the harmonious blend of internal and external balance, affecting both monetary and fiscal indicators,e.g. exports, imports, manufacturing growth, money supply and so on. Demand for exports depends on economic conditions in foreign countries, prices (relative inflation and exchange rate), and perception of quality, reliability, and so on.According to the orthodox approach, the devaluation enhances competitiveness, increases exports and bends demand toward domestically produced goods, thus expanding the production of tradable. For demand and supply side contractionary effects “Imports” measuring purchases from abroad, add to well being but may displace domestic production and drain financial resources. Changes in imports prices reflect changes in foreign prices, exchange rates and quantity.
The lack of zeal of domestic corporate executives to engage investment in the industrial sector exposes finance capital to the hazard of foreign invasion, which implies thatforeign investors could take this advantage to expropriate the wealth of the nation, and thus hamper the strength of the Ethiopian economy because capital is mobile, and globalization is about interconnectedness and interdependence as the finance capital available in the economy is being moved at will to the economy of other states. Thus, globalization has brought about the domination of the Ethiopian economy since its basic export is woven around raw materials (the basis for production and further production), whereas export in Ethiopia promotes economic diversification abroad and restricts diversification in the domestic setting, placing the Ethiopian economy in an uncompetitive space in the global trade circle. Currency devaluation on the basis of a certain economic policy is something every nation does occasionally, more so amongst the developed nations than developing ones with the exception of China. Some 20 years ago Canada did it to stimulate the economy to pull it out of the early 1990s severe recession. Canada devalued the currency by 45% at some point. Then again, Canada is economically integrated with the US, over 80% is exported to the United States, and for that reason the devaluation was understandable. The timing also did have something to do with, a new trade regime was on its way being implemented (NAFTA) US did not mind for the border town States benefited from the exchange rate advantage of importing Canadian goods and products to present it for the voracious appetite of US consumers.
Although the depreciation would take only a year and half but raising it back to the level it was prior to the recession, it would take over seven years. Because it would be very risky for the confidence of the Canadian economy to maintain that low exchange rate after the economy got its wing to fly, foreign investors cannot get a good return for their PDF created with pdfFactory Pro trial version investment if that low exchange rate was maintained, so instead of attracting few more investors the currency devaluing nation can lose many more investors. So, one has to show confidence on their economy by maintaining strength on their currency to reflect a good management and command.
Given the above example its not a bad idea for Ethiopia to devalue BIRR, however the trade deficit Ethiopia has is far greater to compensate by the export increase it will have no matter how large the export is, because Ethiopia is an 80 million nation with trade deficit is into billions. So devaluing the currency may encourage one time (short term) investors to come and take advantage but they will leave once that advantage runs its course. Those who buy real estate would benefit from the exchange rate advantage it will give them, but all others things will rise immediately after. As illustrated above, Ethiopia is an import economy nation. In the long term the country could lose its ability to maintain that same juice stimulant for an extended period of time knowing the way I know Ethiopia. China on the other hand can manipulate its currency as much as it wants for however long it desires for it has a huge reserve, essentially driving the world currency exchange rate. Alluding to the fact, if one controls the US currency, one has the world in their pocket. Ethiopia does not have excessive reserve like China does, as a matter of fact Ethiopia is running a yearly deficit economy, which means it cannot do what China does and come out unscathed. It may help it for a one time currency collection by giving the labor of the citizens to the foreign investor accumulating the extra 20% and using that extra juice the one time foreign investor can increase the margin of profit by a 20%.
However, that’s where it stops. The nation would have to devalue its currency furtherdown in order to get another stimulant juice; the question then becomes where the devaluing stop does. The basic adjustment policy dilemma may be easily illustrated by the simplest of all open economy frameworks where:exports, imports, aggregate domestic output, consumption, investment and government expenditure. Matters would be relatively clear cut if there were well defined correct and incorrect policies relating to macroeconomic stability, microeconomic efficiency and openness.
A bad harvest, or a fall in export prices may reduce both export revenue and taxrevenue. Or, where sovereign debt is denominated in US dollars, an increase in worldinterest rates or an appreciation in the US dollar will lead to an increase in vernment expenditure expressed in domestic currency. Apart from such exogenous shocks, it may also be the case that the characteristics typically found in Ethiopia make it more of a challenge to conduct macroeconomic management. It may be more difficult to control government expenditure, to increase tax revenue, to avoid monetising fiscal deficits, to control the supply of money and to pursue inflation targeting. Exchange rate depreciation may also be less effective if the inflation it induces impedes its relative price effect, if foreign trade price elasticities are relatively low.
Similarly, the counter-inflationary effects of overvalued exchange rates are unlikely to offer sufficient compensation for the erosion of international competitiveness and the expectations of devaluation to which they lead. Policy prescriptions relating to structural adjustment and the supply side. There is less consensus surrounding the causes of economic growth and the effects of openness, with the consequence that there is more debate and disagreement about what policies will increase aggregate supply in the long run. What is the appropriate role of the state? To what extent will privatization stimulate PDF created with pdfFactory Pro trial version growth? Which elements of government expenditure show the biggest return in terms of economic growth? What is the impact of openness and trade liberalization on growth?
What is the connection between financial liberalization and growth? In what order should Ethiopia exhibit a relatively high degree of export concentration on commodities whose price in world markets is often unstable. At the same time, where the price is denominated in US dollars, variations in the price of the dollar may be another factor in determining how the international purchasing power of a specific volume of exports may change.
So where does this leave us? If it seems to imply that the issues are highly complex, that our understanding of them is still limited, that there is a potentially explosive combination of economics and politics, and that there are no easy answers, then it is because this is exactly what the situation is. But at the same time the absence of easy answers is not an argument for policy inaction. It is a matter of learning by doing, trying to avoid doing harm, and gradually evolving towards a better outcome.The technical (and political) question to be raised is the following: is it really possible – in order to raise and maintain economic growth at 11-15% per year for a longer time - to have a much better exchange rate for the current account balance and, at the same time, a lower nominal interest rate, without igniting inflationary pressures in the Ethiopian economy?
The answer – as always in macroeconomics – is maybe yes. It all depends on inflation expectations, exchange rate expectations, monetary and fiscal policy.Any simple macromodel normally suggests that, in an open economy, inflation is determined by expectations of inflation, the output gap and the rate of exchange devaluation. Additionally, it is well known that the interest rate differential with respect to the rest of the world tends to reflect the expected rate of exchange devaluation. Furthermore, economic growth depends on the existing output gap, as well as monetary and fiscal policy ( in addition to long-term trends, of course, such as productivity and demographics).Even a simple model like this shows that the major challenge is to promote a devaluation of the currency ( under fixed-but-adjustable rates or under dirtyfloating rates) which might be able to bring the expected rate of future exchange devaluations to zero or even “negative” figures. And, at the same time, it must represent a real devaluation, with a small impact on domestic inflation. Is that possible? Again: maybe yes.

“Merkato”, The Home of Two Religions

During the Jumaa prayers, Islamic parching (hutba) will be presented by the Imam. Sometimes it coincides with the sound of the Mass prayers from the church. The faithful will be disturbed by a mingled and distorted voice from the two loud speakers. St. Raguel’s Church has a big building on one side of the fence. The shops in the building exhibit the same confusion.
Mohamed Selman-Addis Ababa)

This land, Ethiopia, is a piece of land on which the fear of God (Taqwa, in Arabic) overshadows; if anyone wants to prove this, just visit Piassa and Merakato, where gold is being sold like a pile of grain. I remember one of Addis Neger Newspaper’s articles titled, “Why Do The Ethiopian Poor Not Rob?”–that article had listed “the fear of God” as one reason why the Ethiopian poor do not rob.

There is a saying about the skills of the Merkato thieves: “they can steal your tattoo without touching you”. But these same thieves are known for one thing–they will return your useful documents if they find them in their loot, and try never to kill while stealing. I think these guys would prefer not to steal for their living. What can I say, I am proud of my country’s God-fearing thieves!

Ethiopia is recorded in both of the holy books of the great religions. Repeatedly, while we cannot find the US or the UK even once, Ethiopia is known for giving refuge to the disciples (Sahabas) of the Prophet Mohammed in the 7th century. When we speak about Ethiopia being named in the Bible repeatedly, we have to know that it includes Merkato–just because Merkato is found in Ethiopia.

Among my childhood memories are the “thief beating scenes” in the great Anwar mosque. In the moment when the barefoot faithful go down and up in an act of worship, the shoe thieves are on duty. Some unfortunate thieves will be caught by the faithful and dealt mob justice. Everyone tries to beat the unfortunate thief at least once. Watching heavy people girding up their ceremonial robes to use their hidden acrobatic skills gave me a secret pleasure. These scenes also gave me a chance to contribute to the beating. I liked this scene so much that I even invited my Christian friends to watch it.

They followed me to the mosque, for they also liked this ‘ritual’ In my childhood home, Merkato, even if they were not many, I had Christian neighbors. As the famous song of Teddy Afro goes, “Is it not Raguel (the church), Anwar’s (the mosque) neighbor?” When the time came for Ramadan fasting, our friendship strengthened. We celebrated the “Iftir” feast together. At dusk we went to my home to share the dates, the Asambusa, and sometimes the soup ready for the evening feast. They even sometimes helped me keep the fast by not eating their breakfast until mid-day (of course, this may sometimes have been because they lacked something to eat). We sometimes made fun of each other’s fasting cultures. They teased me, saying, “What is the difficulty in fasting in the day after eating in the night?” “How could you call this a fast since you eat shiro and lentils?” I remember that I was always the winner because my friends ate meat and other animals products so rarely that it was easy for me to mock them in return, chiding, “you are always in the Lent season!”

My friends were happy during Ramadan because we could buy dates and enjoy them. They also repaid me during their Epiphany and Buhe celebrations. I was with them, playing the harmonica, on the day of Epiphany. The celebration of Buhe was also, for us, a day on which we collected money by singing the season’s traditional songs. It was only much later that I discovered that Buhe has a religious meaning. We celebrated those days not as religious holy days in which we acquired spiritual benefits; rather, we celebrated them as cultural feasts.

I have no idea how the word “compromise” started to be used in framing the Muslim and Christian relations in Ethiopia. In my understanding, the Muslims and Christians in Ethiopia live together with love rather than compromise. I don’t like this word when it is applied in this context. I can clearly recall those relations tied with love from my childhood memories. Most of my childhood friends are now slipping out of religion. But some are strengthening their faith.

Nowadays, I hear that singing the Buhe traditional songs is a Christian role. I urged by many not to have a friend who is from a different religion. The spiritual books I read sometimes have no love in them. Most of the literature contains warnings of the coming dangers of my religion and urgings of vigilence against them.

The books that comprise the counterpart are also as dangerous as these ones. Some priests are preaching argumentative sermons. The same messages are being printed on T shirts, CDs and books. My Merkato today is full of these controversies.

Ramadan and “Filseta”: one side of two coins

In these fasting seasons, when the faithful turn their face to their God and the business of the fasting days mounts, Merkato hosts mobile churches and mosques carried by vehicles. Sermons broadcast by different loudspeakers adds chaos to the already busy marketplace. Gospel songs and Menzumas (Islamic songs) spread without limits. These “mobile churches and mosques” Coax bystanders with their proclamations–“buy this cassette and you shall be saved!” Similarly, they strive to increase the numbers of people who go to “Genet” and “jenet’.

The 16-day fast of the Orthodox Church, Filseta Maryam (the assumption of Mary), is the second greatest fasting season–next to Lent.–for summoning the believers to church. Many Christians wearing netelas (Ethiopian traditional cloth) march to the church of St. Raguel. Multitudes of Muslim believers, who number a little greater than the Christians, also stride to the neighboring Anwar mosque. The reason for this is the Muslim’s fasting season, Ramadan. The priest’s mantle and the Muslim cape, the Christian netela and the Muslim robe go together until they reach their respective worship places. This scene reaches its highest peak on Fridays.

The narrow road that divides the church from the mosque permits passage for only one vehicle. The number of the faithful in the worshiping places, on the contrary, far exceeds the space in the church and in the mosque. Because of this, the believers are forced to use the main roads, especially on the central days of prayers. During the Ramadan Jumaa prayers, Anwar mosque–which swells to four or five times its usual attendance—appropriates a third of Merkato as a place of prayer. The southern Cinema Ras, the western Tana Mall, (and sometimes Mierab Hotel), the northern Gojam Berenda, and the eastern American Gibi, mark the ends of the gathering. This forces the Christians and the Muslims to stand together for prayers. The Ramadan evening prayer, “Terawih”, requires a little more time than usual. The faithful park their cars around both of the places of worship. They pray beside the fences of the church, even designating the verandahs of the church buildings as temporary places of worship. I always wish to take photos of these scenes.

During the Jumaa prayers, Islamic parching (hutba) will be presented by the Imam. Sometimes it coincides with the sound of the Mass prayers from the church. The faithful will be disturbed by a mingled and distorted voice from the two loud speakers. St. Raguel’s Church has a big building on one side of the fence. The shops in the building exhibit the same confusion. The upper part of the building houses a school named after the church, while the other floors are occupied by different shops. Most of the shops are selling mobile accessories and mobile phones; the western wing of the building has shops for bags, blankets and Christian songs. The shops of the eastern wing, however, are providing Islamic articles. The building café called “Henny Penny” provides Islamic foods and beverages for the Ramadan season. This cross-shaped building, owned by the church, has shops in which Islamic clothes and other articles for sale. Abaya, Niqab, Hijab, Bourqa, (all articles of Islamic women’s clothing) as well as some mats for Muslim prayers. Some may dismiss this as mere marketing but for me it holds greater significance” Our poor life style and our culture influence our social life, and this is apparent in our religions too. My mom never missed invitations to religious feasts in the house of a Christian priest. I do not remember choosing my childhood friends based on their religion.

Some of my friends still remember the Arabic alphabets and some Qur’anic quotations they memorized in Islamic schools. In the same way, my Muslim neighbors and I have never considered the “Qes timihirtbet” (church based children’s school) to be more than a kindergarten. But this feeling seems to be absent in the new generation. Today’s Muslim friends of mine are more concerned about the issues of Iraq than their country. This might not be a mistake at all, but there seems to be some danger behind their allegiance. Most books in their homes are about “how to defeat the Zionist plot” or how other religions are working day and night to destroy Islam. The weekly newspapers also exaggerate Bin Laden’s destruction on the NATO forces.

Plenty of such literature is being sold in the road that divides the mosque and the church. The books I saw on both sides while I was writing this article are enough to validate my concern on the issue.

“The Identity of Jesus is Revealed”

“For the Loss of the Scale the Gold Has Lost: Who Oppresses Women, Christianity or Islam?”

“Jesus: is he a Prophet or a Creator”

“Who Authored the Quran?”

“Answer for Muslims: The Identity of Jesus”

It is hard not to conclude that the tension between Anwar and Raguel, is representative of the entire country. Social life is weakening; ridicule for the other side seems to be strengthening. Such tensions were showcased in the recent past. The association known as “The Military Tera Retailers Share Company” conducted a meeting in the auditorium of St. Raguel Church. Because some of the members of the association were Muslims, they attended the meeting wearing their religious capes.

The leaders of the meeting asked the Muslims to remove their capes since they were in the church compound. The Muslim members then demanded to know why they were called to the meeting if this was the case, and walked out of the meeting. Some of them even got physical. Where is the patience? Over the past two years, religious tension is growing and increasingly requiring government interference. Abay Tsehaye, the prime minister’s security affairs advisor, was busy trying to solve the general increase in religious tensions.

The followers of both religions were using their religious holidays to demonstrate how strong their influences are by amassing believers in numbers. Sometimes they speak ill of each other but in an indirect way. They print threatening messages on T-shirts and spread them to their followers. They announced that this “island has no place for other religions. Seeing all of this, I seriously fear that our relationship is on the verge of ruin. The respected history of our relationship may be only history, unless Allah and God intercede for its redemption.