Impact of currency Changing Ethiopia [Short-run and Long-run]

 

 

 

 

 

 

 

Impact of currency Change

Ethiopia

[Short-run and Long-run]

 

 

By Amare Alemu

 

September 14, 2020

 

Impact of Currency changing in Ethiopia

It was evident that Ethiopia has entered the arena of political reform. The reform will be assumed to have a positive impact on the social, political, and economic development of the country. This paper will see the currency change endeavor as one of the fruits of the reform that is announced recently by the government. The report will address questions like what are the short-run impacts of this effort? What are the long-run consequences? What will be the conclusion out of it? Corruption, inflation, job creation, increase purchasing power,

1. Social Impact

1.1 Corruption

When governments change their currencies, they will give them strength. It will lower the possibility of corruption (Onyango, 2019). The author discussed it further:

Changing a currency has strengthening governance and associated institutions are central to the fight against corruption and by extension the parallel economy. In this regard, effective control of regulations relating to public procurement and effective oversights of public expenditures at national and county governments and meting out severe punishment or punitive measures against anti-social behaviors. (Onyango, 2019).

1.2 Job creation/ Employment/ unemployment

Because of the prevailing contraband and black market, the government and all except a few financial institutions were suffering from foreign currency shortage. It caused unhealing cancer in the nation. The unemployment rate is untold-able. Business owners have a double bookkeeping system [one for the black market and the other for government taxation] that caused all in all the taxing system very weak. The black market is illegal (Wikipedia, n.d.).

Because tax evasion or participation in a black market activity is illegal, participants will attempt to hide their behavior from the government or regulatory authority.[3] Cash usage is the preferred medium of exchange in illegal transactions since cash usage does not leave a footprint.[4] Common motives for operating in black markets are to trade contraband, avoid taxes and regulations, or skirt price controls or rationing. Typically, the totality of such activity is referred to with the definite article as a complement to the official economies, by market for such goods and services, e.g. "the black market in bush meat." (Wikipedia, n.d.)

2. Political Impact

In Ethiopia, the TPLF party was on power for at least 27 years. Many reports suggest that the party was dominant in all decision-making mechanisms. It was blamed in many ways. One of the reasons was the problem of limitless money printing. The party collected all the money with it when leaving the authority. Now the news of currency changing will be the biggest headache and saddening for this party. For the TPLF, all that wrongly printed amount of money will be void. It will be really a saddening news.

3. Economic Impact

3.1 Inflation

The amount of money supply in the market causes inflation. Now what the government did in Ethiopia is meant to collect that money from the market. Does it play a significant role in reducing the price? We will see it in 3.2 below. The worst scenario in Ethiopia is people are carrying massive amounts of money. When too much money is printed and left on people's hands, prices will go up unstoppably (Younkins, 2000). He noted that:

Inflation consists of expanding a nation's money supply by adding something other than real money (e.g., gold). Such fiat money, backed only by government decree, produces inflation. If the quantity of money is increased, the purchasing power of the monetary unit declines, and the number of goods and services that can be purchased for one unit of this money also decreases. When government expands the quantity of paper money, the purchasing power of the monetary unit drops, and prices rise. After the new money has been added to the economy, the total wealth produced is not any greater than it was previously. With added money now being spent, but with no additional goods and services to spend it on, prices will rise. In the U.S., it is only the federal government and government recognized banks that can print money and/or create new dollar credit. (Younkins, 2000)

3.2 Devaluation

Reducing the amount of money in the market by itself does not bring commodity price reduction. In other words, it does not bring inflation down. It may get a significant impact if only combined with devaluation mechanisms. Ethiopia imports everything. All Ethiopian imports need hard currency. Ethiopia has only one commodity that needs devaluation. It is coffee. Regarding this commodity Ethiopian government has a wrong understanding. Coffee is a necessity commodity for its export; it does not require a devaluation option. Ethiopian economic policy needs to opt-out of this devaluation option. Unlike the UK, devaluation in the Ethiopian case means an evil device for the wellbeing of the nations (Pettinger, 2017).  He further discussed that:

If there is a devaluation, then there will be an increase in the price of imported goods. Imports are quite a significant part of the CPI; therefore, they will contribute towards cost-push inflation. It is possible that retailers may not pass the price increases onto consumers but have lower profit margins, but if the devaluation is sustained, prices will go up. (Pettinger, 2017)

To wind it up, in the short-run the change in currency has a significant impact on 1) controlling the black market. 2) reducing the unnecessary money amount in the market. 3) increasing the opportunity of job creation therein, lowering the unemployment rate. In the long-run, It has to create a combo measure with a devaluation mechanism. Otherwise, it will have a less positive effect. The wrong conceptual framework that ties the devaluation principle with coffee export should be revisited to make proper analysis and assessment on what to do next in that economy.

References

Onyango, C. H. (2019). How change of currency notes affects economy. https://www.businessdailyafrica.com/analysis/ideas/How-change-of-currency-notes-affects-economy/4259414-5165256-76ofcq/index.html

Pettinger, T. (2017). Does devaluation cause inflation? https://www.economicshelp.org/macroeconomics/macroessays/does-devaluation-cause-inflation/

Wikipedia. (n.d.). Black market. https://en.wikipedia.org/wiki/Black_market