Ethiopia's exchange rate is still unstable! Coffee exports will slow down

Recently, a document from the Ethiopian Prime Minister's office circulated on the social platform, claiming that the source of the design elements of the new Ethiopian banknote Bill, and describing the face of Ethiopian Prime Minister Abby will be printed on the front of the banknote. It also said that the new 500 and 1000 Bill banknotes as well as the basis for color design would be printed.

However, the Ethiopian authorities clarified the incident, saying that the news that the government would print a new 500 and 1000 Bill currency was false. It was believed that the fake document was circulated on social media and was intended to spread false news that was not conducive to Ethiopia's interests. And earlier, all kinds of false information and false news against Ethiopia appeared again and again.

Although the Ethiopian authorities have clarified the printing of the new Bill currency, many people believe that the reason behind it is exchange rate instability. At the end of July this year, Ethiopia implemented a major revision of the foreign exchange system, introducing a market-based competitive exchange rate determination mechanism, that is, allowing the market to determine the exchange rate of the Ethiopian currency Bill. On the day of release, the Ethiopian currency immediately depreciated by up to 30%.

It has been a month since the policy was announced, with 57 bill per dollar at the end of July and 110 yuan per dollar now, with the Ethiopian currency down nearly 100%. The aim is to narrow the gap between the official exchange rate and the parallel market (black market) exchange rate, which is now narrowed to 10%.

However, at present, the security problem in Ethiopia is serious, and Ethiopia has bad relations with neighboring Somalia and Eritrea. According to Ethiopian media reports, two Egyptian military aircraft arrived in Ethiopia's neighboring Somalia on the 27th of this month. It is said that Egypt will deploy 10,000 troops in Somalia after Egypt signed a defense agreement with Somalia. At present, these two military aircraft and military equipment are part of them.

As a result, Ethiopian officials issued a statement saying that they are vigilantly monitoring the development of the area that may threaten national security. Ethiopia remains committed to the peaceful settlement of differences and to working with the Somali people and the international community to avoid risks to peace and stability in the region.

In response, the Deputy Governor and Chief Economist of the National Bank of Ethiopia is concerned that the disruption in foreign exchange supply could lead to a renewed expansion of the exchange rate gap. In theory, the devaluation of the Ethiopian currency Bill after the reform will increase exports and make exports cheaper, but the demand for exports is unstable, while domestic prices and costs rise as a result of exchange rate inflation.

In particular, Ethiopia is very dependent on the export of agricultural products such as coffee, but these agricultural products are vulnerable to fluctuations such as high import inputs such as chemical fertilizers, as well as domestic inflation and security problems, which are not helpful to the competitiveness of products. In addition, there are still armed conflicts in many parts of Ethiopia recently, and they are spreading from the north to the south.

These security issues also have a strong impact on the exchange rate, so the exchange rate will be unstable in the near future and is likely to continue to fall. For the coffee industry, according to Ethiopian economists, because fluctuations in the exchange rate may exacerbate inflationary pressures, make goods more expensive, and may lead to a surge in illegal trade, as exporters find it more profitable to avoid formal export procedures, exports of agricultural products such as coffee are unlikely to increase significantly in the short term, and exports will slow or stagnate.