This balance has historically been supported by official transfers e. This is not a problem in the short run if the exchange rate is fairly valued, for example under a floating exchange rate, or if a country has significant reserves to maintain an overvalued pegged exchange rate. Figure 2: Foreign Exchange reserves to import ratio, Ethiopia [xvi]. In fact, the government has responded. With the continued appreciation of the US dollar against other currencies, Ethiopia has started devaluing the Birr further.
But the first is a band-aid solution and the second will take more time than Ethiopia has to spare. With mounting pressure to devalue the currency, investors may be unwilling to take the plunge into a new market until this occurs through a further devaluation round or currency float. Businesses domestically are also often unable to import the equipment and products they need in a timely way, reducing their competitiveness. Figure 3: Monthly inflation rate annualised , Ethiopia [xxi].
Foreign owned businesses in Ethiopia have difficulty recovering any capital brought into the country in foreign exchange, once it has been converted to the local currency. Paying dividends to investors abroad is also difficult, as there is no explicit approval to exchange Birr back to foreign currency for this purpose in the regulation [xxiv]. For companies with wholly domestic revenues, this is an impossible sell to investors if their retained earnings devalue every year that they cannot be repatriated. There are two primary ways that businesses can circumvent these rules in order to repatriate funds.
Capital controls and exchange rate flexibility have risks but could improve investor confidence in foreign exchange. Despite the work-arounds, capital controls are problematic because they limit investment in Ethiopia and reduce the potential to recover tax receipts for companies that do invest. An approach more tailored to foreign investors would be to ease capital controls, while strengthening tax enforcement and collections.
While controls exist to reduce outflows of foreign exchange from the country, they are currently discouraging investors from bringing new capital in as well. Strengthening the tax base from foreign investors would give Ethiopia more flexibility to float the currency in the future, as it would improve the budget balance and reduce reliance on monetary policy. One option that nobody domestically is excited about is floating the currency.
This would likely lead to a devaluation, but it would also induce a fairer valuation of the currency and reduce the risk for foreign investors, many of whom are unwilling to invest until devaluation occurs.
The Horrors of COVID-19 and the Recent Macroeconomy in Ethiopia
It also would make it possible to redeem Birr for US dollars to repatriate dividends and capital stakes to foreign companies. However, any devaluation on the floating market would come with even higher inflation rates that would need to be managed carefully. Managing the float in increments could be a way to smoothly introduce more exchange rate flexibility and allow for the government improve their fiscal position before a full devaluation.
This conventional approach underestimates the true economic costs of infectious diseases of epidemic proportions which are highly transmissible and for which there is no vaccine e. The experience from these previous disease outbreaks provides valuable information on how to think about the implications of COVID Given the recent study conducted by Alemayehu Geda about the social and economic impact of COVID in Ethiopia and using local and global media-based information and information obtained from interaction with some of the industry actors as well as his own research about the Ethiopian economy, one can understand and come up with the possible economic impact of the virus on the country.
That study noted that GDP may contract by In the worst-case scenario of the effect hanging around for the coming three quarters, the decline in growth could be as high as If it is not, the government needs a growth rate of Understanding the above horrors of COVID and looking back to macroeconomic variables are a crucial moment. However, the current review may not deliver you with full information on the pandemic and its impact on all macroeconomic variables.
For specification, we aimed at reviewing Ethiopian gross domestic product, unemployment, inflation, and fiscal and monetary economics or macroeconomic policy variables which can cause economic instability or crises in conjunction with the coronavirus outbreak in Ethiopia.
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- The Horrors of COVID and the Recent Macroeconomy in Ethiopia | SpringerLink;
- The effect of exchange rates on economic growth in Ethiopia - GRIN!
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Therefore, this review article is in a position to give brief information on the current pandemic relative to some important macroeconomic variables in a country. The search was restricted to papers and articles published in English in both academic and gray literature.
Ethiopian foreign exchange shortage will last years- new premier
The review was initiated in ; with the incorporation of selected additional studies, published materials are area under consideration with the same search methodology. The knowledge and experience of the authors and additional feedback gained through the pandemic resulted in some additional references. The review focused on reviewing the most important macroeconomic variables: Ethiopian gross domestic product, unemployment, inflation, and fiscal and monetary economics or macroeconomic policy variables which can cause economic instability or crises due to the coronavirus outbreak in Ethiopia.
The government also predicted that about 30 million half of this because of COVID effect people could be food insecure and need help this year alone. Thus, the economic and social impact of COVID is to change this precarious macroeconomic condition for the worst. As can be observed from the table, one can identify the impact of COVID on aggregate macroeconomic variables real GDP, inflation, gross domestic saving, gross domestic investment, reserve in months of imports, budget deficit, total debt, and trade balance figuring out the change with and without the pandemic.
The economy of Ethiopia will shrink between 5. With this information, the effected of the 11 percent economic shock is to reduce this GDP by billion Birr. In the best-case scenario of a 5. His paper stated that, with partial lockdown of the country as part of its mitigation strategy of COVID, 2. If a wider and more adverse domestic virus spread scenario is assumed and should the global recovery be prolonged, macro-impacts would be several orders of magnitude larger than is presented here. For the upcoming fiscal year, given full-year effects, we think the impact will be more substantive at 2.
In the event of the best-case scenario and hence a 5.
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In Ethiopia, there were two arguments on the impact of coronavirus: The first is the optimistic viewpoint that supports import substitution. This positive impact resulted in innovation for domestic industries which are engaged in producing newly emerging products used to protect the pandemic and consumption.
In a nutshell argument, in a coronavirus environment, the poor becomes poorest and the rich become richest resulting in unemployment, income inequality, unfair distribution, and aggravate poverty. It will diminish new job creation and increase unemployment.
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Job losses are expected in the construction, manufacturing, and service sectors as global value chains breakdown, businesses close, and small businesses fail under the pressure of extended shutdowns. Urgent actions are required to protect jobs and reduce the shock on a vulnerable population. The Jobs Creation Commission preliminary estimations suggest, over the next 3 months, 1. World Bank, Ethiopia A significant proportion of the , small- and medium-sized enterprises SMEs in Ethiopia could come under pressure, even with a crisis lasting a single quarter, let alone two or more successive quarters.
COVID is likely to intensify existing economic inequalities between men and women for a variety of reasons. Annual inflation, both food and non-food, is likely to accelerate due to supply side disruptions including the locust invasion and pressure on the exchange rate. Given the magnitude and combination of factors at play right now, a surge in food inflation well above the current rate of Barring further shocks, there could be a significant deceleration in , although single digits seem highly ambitious United Nations Ethiopia Inflation, both food and non-food, is likely to accelerate due to supply side disruptions including the locust invasion and pressure on the exchange rate see below.
Barring further shocks, there could be a significant slowing in , although single digit would be a convergence of much improved economic conditions, including on the supply and forex side, and continued effective use of monetary and fiscal tools. High dependence on revenues from imports and profit-making state-owned enterprises SoEs such as Ethiopian Airlines has left Ethiopia vulnerable to the fiscal effects of the pandemic.
Similarly, public debt was below the African average. COVID will have a twofold fiscal impact, pulling in opposite directions. First, there will be pressure to spend more to deal with the health and socioeconomic impacts of the pandemic—and this is happening already with an initial 5 billion birr in additional expenditure authorized by the Parliament. Second, revenue collection is likely to be hit hard as a result of a contraction in economic growth as well as a fall in trade taxes due to decreased exports and imports.
This will limit fiscal space, but the constraint could be handled by relaxing targets for the current and next fiscal years as well as finding non-inflationary sources of financing such as significantly new external concessional or near-concessional financing as well as debt reduction not just temporary relief, which would increase repayment obligations in future years.
The direct fiscal cost of the pandemic arises from the cost of providing health care to those that suffer from the virus and making testing available to the targeted segment of the population. Moreover, the direct cost includes the intervention to humanitarian needs arising from income loss of individuals due to economic slowdown and social distancing.
Another aspect of the direct cost is the expense that will be incurred to subsidize industries that might otherwise go bankrupt. The indirect cost of the pandemic on the fiscal situation of the country arises from the decline of government revenue. The following are channels through which the revenue impact will be felt:.
A decline in imports will impact negatively the revenue from foreign trade tax collection. In total, it was planned to collect However, a decline in economic activity and the disruption of the global supply chains for imported items are expected to significantly reduce revenue from foreign trade taxes. Revenue losses due to the impact of the epidemic are estimated to be around A slowdown in domestic economic activities will impact negatively the revenue from domestic indirect taxes.
A decline in economic activity and reduction in household consumption are expected to highly affect the government revenue mobilization from domestic indirect taxes such as value-added and excise taxes.
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The government revenue loss from these sources is estimated to reach 4. A significant slowdown in domestic economic activities will also impact negatively the revenue from direct taxes including employment income tax with the private firms to lay-off employees. A decline in economic activity is expected to reduce income tax, business profit tax, and other direct taxes. The revenue loss from this component is estimated to reach 1. Non-tax revenue collection from government services is impacted.