Mogadishu (PP Editorial) — The IMF is urging Ethiopia to devalue the birr, seen as a crucial step to gain IMF loan. Currently, the black market rate for the birr is 50% lower than the official rate, causing difficulties for Ethiopian businessmen trying to exchange currency at the central bank, where the official rate remains higher.
Devaluing the birr could attract more investors to Ethiopia, but it would also raise costs for importers. This situation mirrors the economic experiment Somalia underwent between 1986 and 1990, when the IMF imposed a Structural Adjustment Program, leading to rapid inflation and various economic challenges .
In January 1986, one hundred Somali Shillings could purchase 1 dollar. However, the IMF’s auction of the US dollar under the Structural Adjustment Program (SAP) led to a sharp increase in the exchange rate and resulted in rapid inflation. As a result, food importers were compelled to hoard their commodities because the government prohibited them from adjusting wholesale food prices to align with the new IMF-mandated exchange rate. SAP compelled the government to reduce public spending. The education ministry had to introduce fees on schools to subsidise teacher salaries.
Ethiopia, once praised for its economic growth, now faces tough decisions, particularly as it seeks a new loan programme from the IMF. Despite past resistance, Ethiopia may need to consider IMF recommendations if it aims to attract foreign direct investment. The economic policies of past leaders, such as Meles Zenawi, offer lessons for Abiy Ahmed, who must carefully navigate Ethiopia’s economic future.
In Globalization and Its Discontents Professor Joseph Stiglitz discusses Ethiopia’s economic policies under Meles Zenawi, who resisted pressure from the Bretton Woods institutions to open Ethiopian banking markets to foreign banks. Meles, who came to power in 1991 with a developmental state agenda, eventually saw this agenda become a tool for the TPLF to maintain power for 27 years. Abiy Ahmed faces significant economic considerations this weekend as he reflects on these lessons.
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