Changes and Economic Stabilization: The Ethiopian Experience
Sarlo Distinguished Professor of Sustainable Economic Development
Though the currency is not backed by
gold or silver, Ethiopians have been reasonably using birr
banknotes and coins as a medium of exchange, as a unit of account, and for
storing wealth. As a
medium of exchange, the Ethiopian birr serves for buying and
selling goods and services. As a
unit of account, the birr is
used to set a common standard for measuring relative worth of goods and
services. As a store of value, the birr is commonly used as the
most liquid asset for retaining wealth.
Prior to the Ethio-Eritrea conflict
that occurred in 1998, the Ethiopian birr at the time was
demonetized and subsequently monetized as a new currency. Currently, the
Prime Minister of Ethiopia, Abiy (hereafter referred to Abiy) has spent US
$101.2 million to redesign the symbols in the face value of the existing birr
notes of 10, 50, and 100; mint coins; and print a new 200 birr
note. As unveiled by Abiy, the new currency is presumed vital to withstand
cash hoarding, restrain illegal trade activities, and curtail the illicit
financial flows that have seriously shattered Ethiopia’s economic
stability (Tadesse, September 14, 2020).
To fine-tune the implementation of
the new currency, Abiy’s Government has set a three-month window for the
holders of the old currency to exchange it into new currency notes through
intermediary banks (Mbewa, Sep 14, 2020). Given the unfolding of the new
currency in Ethiopia, the aim of this paper is to analyze the economic
rationale and understand why the original legal tender banknotes
and coins were replaced.
Cash Hoarding: The main
drivers of cash hoarding are opportunity costs, precautionary motive, and
possible stressful situations. Ethiopia’s economy is by and large
cash-based. That is, despite banks in Ethiopia having attempted to unfold
credit cards and checking accounts, most Ethiopians heavily depend on cash
transactions while undertaking business activities. In addition, people
hoard birr currency at home because the strategies forwarded by
banks to attract those who might consider depositing their cash assets
into a savings account have been relatively dismal. For example, it might
be convenient to keep money in banks. But, as decided by the Monetary
Committee of the National Bank of Ethiopia, while the rate of inflation
that prevailed in the country was more than 20 percent per year, the
nominal interest rates that banks pay to depositors in savings account was
set to just 7 percent (Trading Economics, 2020). Thus,
the reason many Ethiopians would like to keep their cash assets at home is
because the opportunity cost (inflation rate and leather shoe time) that
depositors incur outweigh the nominal rate interest rate that they would
obtain from banks.
It needs to be mentioned that due to
the devastating effects of the COVID-19 pandemic, many Ethiopians have
been forced to store their negligible future savings intended for
emergencies at home. However, the banks are partially responsible for
this—as the virus spread rampantly in Ethiopia, commercial banks set
withdrawal signals on bank deposits, giving a clear signal to many
potential depositors that they’d need to stash their money at home
because the banking institutions in Ethiopia were facing liquidity
More importantly, Ethiopian
depositors have been refraining from keeping their financial assets in
savings accounts because, more recently, Ethiopia has been facing
insurmountable mass unrest, human rights violations, and political
instability. In short, in recent years, no day in Ethiopia has passed
without mass demonstrations and political upheaval. As
a result, the Abiy’s Government has put almost every region under
federal security forces-led command posts. With no regard for the rule of
law and the Constitution, the ruling regime has been attempting to
strengthen its own illegal party by depriving, emasculating, and not
allowing other political parties to campaign to their constituencies.
Illegal Trade Activities: The Foreign Service Journal
(October 2018) narrates that illicit trade composed of tangible (drugs,
human beings and weapons) and intangible items that may be sold in
cyberspace (for example, passwords, malware, computer data and funds
stolen from bank accounts) is a spreading threat to the global community.
Though this kind of dreadful activity is very challenging and requires
carefully designed operations to effectively handle, exclusively equating
these horrible acts with the currency changes made in Ethiopia hardly make
sense. Had it prudently planned, the US $101.2 million that Abiy spent on
printing currency and minting coins could have been used to create
sustainable and productive jobs for unemployed youth or to create new
currency funds that could have been used as a possible stimulus package to
stimulate the Ethiopian citizens suffering from the COVID-19 pandemic.
Illicit Financial Flows: As stated by the African Development
Bank (2018), criminal and illicit economies such as counterfeit currency,
black market (hawala), and medications can result in both direct
and indirect negative impacts on a country. As mentioned above, rather
than spending more than US $101.2 million on printing new currency and
minting of coins, as well as on endorsing the law enforcement agencies to
confiscate Ethiopians’ private saving amounting to more than 1.5 million
birr, it would have more prudent to retrain the armed forces to
professionally handle the most conspicuous inappropriate financial flow
dealings in the country. This would allow the remaining balance of the
currency to be wisely utilized toward stimulating investment and creating
an entrepreneurial climate.
Given that currency reform alone
would not create financial stability and resolve all economic problems (Lonnberg,
2013), instead of giving false information to the Ethiopian people that
under Abiy’s leadership, Ethiopia’s
exports have increased by 14 percent and Ethiopia’s external (sovereign)
debt has substantially declined from 35 to 25 percent of GDP (Tadesse,
2020), it would have been worthwhile for Abiy to given his advisors a
degree of freedom and carefully incorporate Ethiopia’s current rate of
inflation (which is over 20%), real interest rates (-13%), unemployment
(over 20%), and Real GDP growth (less than 2%), and assess the
reverberating political instability that is prevailing in the country to
rigorously map out the need for currency changes in Ethiopia.
Stated differently, had the policies
and processes behind the currency reform been careful mapped out, the
currency changes that Ethiopia has now implemented would have achieved notoriety
from both economists and policy makers, and more importantly, would have
also gained the confidence of the Ethiopian public.
If Abiy was not thinking about
differentiating himself from the previous Ethiopian People’s
Revolutionary Democratic Front (EPRDF) regime and starting his own new
monetary era, he would have developed a well-thought-out theoretical
framework and designed clear-cut strategies before officially unveiling
the implementation of the new currency. For example, software needed for
the smooth operation of ATM machines so that they could efficiently
deliver new currency to depositors could have been planned ahead of time.
Now, it has become nerve-wrecking for debit card holders to withdraw from
the ATM machines and not know if they will be receiving the demonetized
old currency or the new currency notes.
Given this, one would not hesitate to
argue that in the name of the new currency, Abiy is trying to legitimatize
his regime, maintain his personal dominance, and differentiate himself
from the EPRDF by giving a completely new name to the currency and thus
mark the start of a new monetary era. As clearly articulated on public
broadcasting stations, to fulfill his political decision, create political
havoc, and gain the support of (bribe) the military force, Abiy has
encouraged law enforcement agencies and entitled them to receive half or
more of the 1.5 million birr
provided they confiscate it from Ethiopian households and business people
hoarding it as cash in their safe deposits.
As shown above, the currency changes
in Ethiopia were framed on irreconcilable and contradictory situations.
Being symbolic, the new currency that is now in circulation in Ethiopia is
specifically tailored for the self-aggrandizement of Abiy’s regime.
Thus, since Abiy’s monetary model didn’t depict current Ethiopia’s
reality and failed to take into consideration the global economic impact
of the COVID-19 pandemic, the notes will remain, but it is very unlikely
to stabilize and create a positive impact on Ethiopia’s economy.
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economy with new currency to tackle hoarding and illegal trade.” Quartz
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Retrieved September 17, 2020.
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“Introducing a new currency is a complex process—one that Turkmenistan
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