Yesterday Ethiopians received a September surprise when the central bank devalued the currency by 20 percent.
Even if you don’t work on anything Ethiopia-related, you should be interested. Why? Here’s the reaction from a leading bank and investment firm in the country:
Given the apparently little justification for a large devaluation from a short-term macroeconomic perspective, we see more longer-term and structural motives for the authorities’ actions. More specifically, we think there is now a conscious effort to experiment with a deliberately undervalued exchange rate (the “China Model” one might call it) and to pursue a more aggressive strategy of import substitution.
Frankly it’s surprising more African nations have not attempted this path. Exchange rates are thought to be grossly overvalued in most countries, making their exports look expensive and other countries’ goods look cheap by comparison. That is not good news for industrial development. Some blame aid for the overvaluation. (See this bit by Raghuram Rajan and Arvind Subramanian.)
Here’s another policy lesson we can all learn from. (It’s time for unintended consequences again.) This one devaluation might look good (say, for exports), but by making an unexpectedly big and unexpectedly timed change, the government has increased the future policy uncertainty. Investors do not like a wildly unpredictable government. A surprise depreciation of 20% leads to a lot of wealth unexpectedly changing hands.
Savers might like the uncertainty ahead even less. If I were a middle class Ethiopian, right now I would be thinking very seriously about pulling my money out of Ethiopian banks and putting them into foreign ones. If the government lets me.
In case it doesn’t show, I am no macroeconomist. Reader opinions? (Especially if you are better informed than me.)
I bet Ethiopia’s neighbors are watching very closely to see if this is a model worth emulating.