(William Davison)

Ethiopia’s birr is overvalued and the country would benefit from a devaluation to boost export revenue and accelerate economic growth, the World Bank said.

Reducing the currency’s value by 10 percent in real terms may lead to a 5 percent increase in stalled export earnings and a 2 percent increase in growth, Lars Moller, the bank’s chief economist in Ethiopia, told reporters today in the capital, Addis Ababa.

Ethiopia last devalued its currency by 17 percent against the dollar in September 2010. Since then, the birr has appreciated in real terms by more than 50 percent, leading to a currency that’s overvalued by 31 percent, Moller said at a presentation of the lender’s third Ethiopia Economic Update.

After growing at a rate of about 20 percent in previous years, annual Ethiopian goods exports have remained steady at about $3 billion for the past two years, primarily because of falling international commodity prices. Foreign earnings from goods may have grown about 8 percent in the fiscal year that ended July 7 from $3.08 billion last year, Prime Minister Hailemariam Desalegn said July 18 to reporters. The country uses the Ethiopian calendar.

Although the exact effect of devaluing the currency is uncertain, there would be some benefit to the country, Moller said.

‘Insufficient Depreciation’

“The bottom line is that Ethiopia competes on prices and the real exchange rate is overvalued,” he said.

A decision to adjust the exchange rate would be made on the basis of what its wider impact on the economy would be, State Minister of Finance Ahmed Shide said at the event. The birr is currently at 19.7495 per dollar.

Ethiopia, the world’s most populous landlocked nation, may grow as much as 8.5 percent this year and next, the International Monetary Fund said last month. The nation earns most foreign-exchange from state-owned Ethiopian Airlines, while coffee exports from Africa’s largest producer of the beans are the highest grossing commodity.

To boost exports, the World Bank also recommended focusing on adding value to commodity exports by expanding processing and packaging, building industrial zones, opening access to credit for small- and medium-size enterprises, and improving costly and time-consuming trade logistics.

Ethiopia is investing to tackle infrastructure bottlenecks such as power and transport networks that have been a barrier to growth, which should help the business climate, Ahmed said.

The World Bank estimates Ethiopia could earn $1 billion a year from exporting electricity by 2023 if all of its hydroelectric projects are completed as planned, Moller said.
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*Originally published on Bloomberg, on Jul 22, 2014, titled “World Bank Urges Ethiopia to Devalue Birr to Boost Exports”