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Ethiopia devalues currency by 15%

The National Bank of Ethiopia last week devalued its currency, the birr, by 15% against the US dollar. The exchange rate shifted from USD 1 / ETB 23.40 to ETB 26.91.

The birr's value is always strictly managed, and during the last five years and more the central bank has engineered a steady annual depreciation of roughly 5% against the dollar, so the recent move looks like a marked shift in policy. However, the bank gave no indication of where it saw the currency going from here.

Despite persistent depreciation, the birr had become overvalued. A cheaper valuation will improve Ethiopia's export competitiveness and help ease foreign currency shortages, which appear to have intensified recently.

Although interest rates were lifted at the same time, to try to reduce the inflationary impact of the devaluation, tighter monetary policy will only limit borrowing and domestic demand. It will not stop import prices rising. International assignees in all countries tend to buy a lot of imported items, so this is a significant issue as far as their cost of living is concerned.

Ethiopia's inflation is already high (latest 10.8% to end-September 2017) and it is likely to rise further following the devaluation.

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