Mereja.Forum

[ZEMEN]

I was checking the exchange rate dollar to Birr in Ethiopia and at bank it is dollar is exchanged 50 Birr and at a black market it is exchanged one dollar to 65 Ethiopian birr. this promoted me to check other countries currency strength and i was surprised to find Eritrea on the top ten of Africa's strong currencies. I thought Eritrea was falling apart and a total entropy? how can this happen? how does it work? If think the Ethiopia Birr is in a bad shape, take a look at Sudanese currency, one dollar is exchanged 446.50 Sudanese pound. WOW. can any one educate us how it works?

[temari]

I was checking the exchange rate dollar to Birr in Ethiopia and at bank it is dollar is exchanged 50 Birr and at a black market it is exchanged one dollar to 65 Ethiopian birr. this promoted me to check other countries currency strength and i was surprised to find Eritrea on the top ten of Africa's strong currencies. I thought Eritrea was falling apart and a total entropy? how can this happen? how does it work? If think the Ethiopia Birr is in a bad shape, take a look at Sudanese currency, one dollar is exchanged 446.50 Sudanese pound. WOW. can any one educate us how it works?

Zemen, during Derg reign the exchange rate of Birr with dollar was less than 2 Birr. It doesn't mean though Ethiopian economy was stronger than today.

The black market exchange rate is what reflects the true exchange rate. The question is what drives the price of the black market? In my view it’s the demand for dollars. A higher demand for dollars means a higher exchange rate.

Just look at our increasing imports. Currently Ethiopia is importing goods worth more than 18 billion dollars per year while exporting only 3.6 dollars and our imports are increasing every year. We are importing essential needs like fertilizers, fuel, inputs for the manufacturing industry etc. but also luxury goods such as expensive cars, makeups, juice etc. All these imports can’t be met with the 3.6 billion we generate from exports. The gap is filled in part by the black market.

A country that imports a big volume compared to its exports will have a higher demand for dollars resulting in a weaker currency and a country with less imports compared to its exports will have less demand for dollars resulting in stronger currency. The demand for dollars is in my view that determines the exchange rate. We are currently witnessing a strong Birr in Tigray (1 USD = 35-40 Birr) because the demand for dollars in Tigray is much lower than the rest of the country.

Note that a weaker currency is not always bad, in fact a weaker currency mostly benefits the export sector. That is the reason why exporting countries in Europe get worried when the Euro becomes too strong against the dollar. They even buy dollars out of the market to help the dollar become stronger against their own currency.

I remember once under Meles how Ethiopian’s coffee exporters refused to export their coffee to the international market due to low coffee prices and a stronger Birr and instead preferred to sell their coffee to the local market to get a better profit. The government had to force them to export. If suddenly 1 dollar is worth only 10 birr then exporters would get less Birr for their dollars they earned. This will destroy their business. That is one reason why the government keeps constantly devaluating the Birr i.e. making the Birr weaker and weaker on the official exchange rate.

Anyway, as long as our imports are increasing every year and as long as our exports do not generate the dollars needed for our imports, Birr will get weaker and weaker.

The solution is either to restrict imports which can negatively affect many businesses or better yet to generate more exports to balance our imports.

[ZEMEN]

I was checking the exchange rate dollar to Birr in Ethiopia and at bank it is dollar is exchanged 50 Birr and at a black market it is exchanged one dollar to 65 Ethiopian birr. this promoted me to check other countries currency strength and i was surprised to find Eritrea on the top ten of Africa's strong currencies. I thought Eritrea was falling apart and a total entropy? how can this happen? how does it work? If think the Ethiopia Birr is in a bad shape, take a look at Sudanese currency, one dollar is exchanged 446.50 Sudanese pound. WOW. can any one educate us how it works?

Zemen, during Derg reign the exchange rate of Birr with dollar was less than 2 Birr. It doesn't mean though Ethiopian economy was stronger than today.

The black market exchange rate is what reflects the true exchange rate. The question is what drives the price of the black market? In my view it’s the demand for dollars. A higher demand for dollars means a higher exchange rate.

Just look at our increasing imports. Currently Ethiopia is importing goods worth more than 18 billion dollars per year while exporting only 3.6 dollars and our imports are increasing every year. We are importing essential needs like fertilizers, fuel, inputs for the manufacturing industry etc. but also luxury goods such as expensive cars, makeups, juice etc. All these imports can’t be met with the 3.6 billion we generate from exports. The gap is filled in part by the black market.

A country that imports a big volume compared to its exports will have a higher demand for dollars resulting in a weaker currency and a country with less imports compared to its exports will have less demand for dollars resulting in stronger currency. The demand for dollars is in my view that determines the exchange rate. We are currently witnessing a strong Birr in Tigray (1 USD = 35-40 Birr) because the demand for dollars in Tigray is much lower than the rest of the country.

Note that a weaker currency is not always bad, in fact a weaker currency mostly benefits the export sector. That is the reason why exporting countries in Europe get worried when the Euro becomes too strong against the dollar. They even buy dollars out of the market to help the dollar become stronger against their own currency.

I remember once under Meles how Ethiopian’s coffee exporters refused to export their coffee to the international market due to low coffee prices and a stronger Birr and instead preferred to sell their coffee to the local market to get a better profit. The government had to force them to export. If suddenly 1 dollar is worth only 10 birr then exporters would get less Birr for their dollars they earned. This will destroy their business. That is one reason why the government keeps constantly devaluating the Birr i.e. making the Birr weaker and weaker on the official exchange rate.

Anyway, as long as our imports are increasing every year and as long as our exports do not generate the dollars needed for our imports, Birr will get weaker and weaker.

The solution is either to restrict imports which can negatively affect many businesses or better yet to generate more exports to balance our imports.

Temari, thank you very much, you cleared up many confusions for me. I thank you, I appropriate it.