Why Devalue Now?

"The more a person has been educated, the greater the likelihood, he is an idiot"  Friedrich Hayek

You are probably wondering why, Mr Hayek, a leading economist of the 20th century, would say something like that. If you happen to be an engineer or scientist, please do not be offended. But if your discipline happens to be economics, we feel sorry for you.

We are writing today, because we are assuming you are aware of the rumors of the street. In case you were not aware of the rumors, here is the script from, Africareview.com

"A new Ethiopian economic report by the World Bank (WB) has advised the government to devalue its currency to speed up the growth of exports.

The report focused on export performance in Ethiopia.

"Ethiopia's real exchange rate is overvalued. Empirical evidence presented in the report suggests that a 10 per cent lower real exchange rate could increase export growth in Ethiopia by more than 5 percentage points per year and increase economic growth by more than 2 percentage points," said, the report, titled 3rd Ethiopian Economic Update: Strengthening Export Performance Through Improved Competitiveness'."

Few years ago, you might recall, the IMF, which is a branch of the world bank, was suggesting Ethiopia was growing at X percent, while the Ethiopian Government was claiming double digits growth. While both sides were agreeing on inflation numbers. It is as if, a single patient, who is diagnosed with some type of sickness, is advised to take three different type of medicine, because the doctors can't agree on what the sickness is; imagine that!

What does a devalued currency have to do with exports? We are glad you are asking dear reader, neither did we know, it is why, we are trying to see, if what the mighty bank is advising, makes any sense. Since we are curious about devaluation. Is a depreciating currency bad?

Not if you are an exporting nation, such as Kazakhstan, which happen to be the largest uranium producer in the world. The Tenge, which is Kazakhstan's currency has depreciated by almost 20%, since the beginning of the year. Kazakhstan being strategically aligned with mother Russia,  the recent geopolitical tensions seem to be the reason why, currency traders are dumping the Tenge. According to recent data, this past quarter alone, the Kazakhs have produced almost 15 million pounds of uranium, and now they are close to producing 60 million pounds for the year. Which accounts for 40% of the worlds uranium production.

In other words, the Kazakhs are now making almost 20% more for every pound of uranium they sell. We are certain, president Vladmir Putin is even more thankful for the sanctions, the west has imposed on him, as mother Russia controls, all of Kazakhstan's uranium production. And of course the west will keep buying as their stock of uranium has depleted and need the nuclear power plants to generate electricity to keep the lights on.

We apologize, dear reader if we have deviated a little, but you might be wondering how is all this related, to mother Ethiopia? We knew you would ask, it is why we are asking, what is Ethiopia's biggest export?

  Ethiopian Became the Largest African Carrier by Revenue and Profit, According To IATA - 09 June, 2014

Ethiopian Airlines, the fastest growing and most profitable airline in Africa, wishes to extend its appreciation to its esteemed customers for their vote of confidence, which has enabled the airline to become for the first time in its 69 years history the largest African carrier with revenue topping 2.3 billion $ in 2013 and profit, according to the airlines ranking of the International Air Transport Association (IATA) published in the 58^thedition of World Air Transport Statistics.
According to IATA annual airlines ranking, Ethiopian is first in Africa and 37^th in the world in revenue as well as first in Africa and 18^th in the world in operating profit.

It seems to us, Ethiopian airlines is a top earner of foreign currency, and next seems to be our traditional commodity export.

The above two chart show the prices of the commodities in the international market, which means we Ethiopians don't have any control of the price, since it fluctuates based on supply and demand. If we were the largest producer of the commodities, and had a large market share of the worlds supply, as the Kazakhs are for uranium, then devaluation would not be a bad idea. 

We are as confused as you are, dear reader, we must be missing something, somewhere. Other wise, the unintended consequences seem to outweigh the benefits of devaluation equation. How about the manufacturing sector? Looking at the most recent available data, manufactured goods aren't a significant contributor of exports, then we wonder if the rumor of devaluation becomes true, who benefits? We do not know, do you, dear reader?

It is why we have a simple advise for the authorities, as if they would listen to us. Do the opposite of what the World Bank, and IMF, suggest to do. In our perspective, it is necessary to have all the industrial zones, the dams, railways, roads, and other basic foundations to be built first, then import all the necessary machines, that will be needed to produce goods for export, since a currency that is over valued make imports cheap, and last but not least have a work force, that is efficient, and faster, than your average Vietnamese at the least. Then devalue all you want, since that is one thing governments are efficient and good at, is trashing a currency. 

We have patiently been waiting for a currency crisis in Ethiopia for a while now, dear reader. It is a question of when, not how or why, if history could be any guide. Countries that  grew at the speed, that Ethiopia is growing at currently, eventually had their currency collapse. Don't be surprised or quick to blame the government, when the chaos comes, remember they are trying to manage 90 million poor souls. It is up to the individual to protect his or her assets and savings. In what should you invest? You are asking us too much, but here is our take, your savings should be, 25% in foreign currency, if possible the Australian dollar, 25% in Gold, 25% in real estate, and last but not least 25% in agricultural land, that you can lease or farm on. This should protect you, should the rumors come true, and from future currency depreciation, as the recommendations are a hedge from inflationary pressures, and economic chaos. 

Regards,

Eskinder Haile

  

The Fallacy of Ethiopian Debt

"There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen". -  Bastiat, Frédéric

It wasn't a while ago, we met a lady that just came back from a vacation. After courteously asking how her vacation was, we immediately shifted to a question that concern us the most. How did you find the change in Ethiopia? As always we expected the usual rant of Ethiopian politics, or how the rich is getting richer, and the poor is poorer. Of course we did hear that, but not to be rude, we just nodded our head, silently telling ourselves, trying to figure out which country is perfect anyway. One thing stood out though, which was, “Yes there are new roads, huge projects, railways, etc., but all this government is going to leave us is debt". We couldn't disagree of the borrowing binge, especially after hearing the lady, few days after, some pundits, and experts on the media were mentioning the issue of debt, Ethiopia is accumulating. 

You may be wondering why we are trying to bore you with another article. We promise, if you give us your undivided attention, our advice may save you some fortune in the future.

What is debt?

An amount of money borrowed by one party from another. Debt can be used to make large purchases that could not be afforded under normal circumstances. A debt arrangement gives the borrowing party permission to borrow under the condition that is to be paid back at a later date, usually with interest. Of course we knew you know, what a debt is, if you may allow us to break it into two categories, it might help to clarify few things.

What is bad debt?

Bad debt is when you borrow to consume or invest in liabilities. From a personal perspective consuming or using materialistic items today, and do not further bring any positive gain, maybe personal satisfaction, besides that, the debt is still owed. On a governmental level, borrowing money to spend on military, food stamps, unemployment benefits, subsidies, and the like, usually bring in negative returns.

What is good debt?

Good debt is when you borrow capital to invest in assets that are expected to bring in cash flow. On a personal level, either one opens his or her own business or invests in other business. From a government perspective, borrowing to build infrastructure, railways, hydro power, schools and the like are some examples of assets a government can borrow to invest.

We also understand that debt has a limit, be it a good or bad. Even though, we don't claim to be doctors, or in this case someone with a P.H.D in economics, we will try to diagnose the Ethiopian economy. The monetary value of all finished goods and services (GDP) in Ethiopia in the year 2000, stood at $8.18 billion. Today in 2014, it is estimated to be approximately $50 billion. In other words, the size of the economy grew six times larger in 14 years. We also know that today the national debt stands at $22 billion. What does this all mean? We are confused as well dear reader, give us a break, we can’t find our calculators.

To make matters simple, let’s assume (isn't that what every economist does, assume), the borrowing binge of the Ethiopian government began in the year 2000. Therefore if we divide, the outstanding public debt, which is $22 billion and divide it by 14 years, it gives us $1.58 billion. Which means, every year, the government borrowed approximately $1.58 billion on behalf of you and me. If the Ethiopian economy is truly where it is today, which is approximately $50 billion, then we need to figure out, how many billions were added every year, since the year 2000. To do so, we simply divide $50 billion by 14 years, which gives us $3.58 billion. In other words for the past 14 years, the Ethiopian economy has added approximately $2 billion per year.

We aren't sure if this is considered good or bad debt. But recent history has shown us, when governments borrow and spend on unproductive deals, usually the amount of borrowed money is greater than GDP. For instance the United States borrows $1 trillion per year, taking the year 2013 as an example, despite borrowing $1 trillion, GDP only grew by $350 billion. We wonder where the money goes, but that's for another day. We did promise, we might be able to save you a fortune, even though we don't possess any crystal ball, history often rhymes, and these are some key issues that rise before a debt or a currency crisis.

·         Debt to GDP ratio reaches 90% historically this is when things start going bad. Today according to CIA fact page it's 50.1%

·         Banks reporting high level of debts going bad, or more than one bank declaring bankruptcy

·         Government corporations not being able to pay their debt.

·         The government begins paying for nanny's, as the French government does, or pays you to stay home as the Greece government did.

Till we see any of the above, you shouldn't lose any sleep at night. 

Regards,

Eskinder Haile