y es   ETHIOPIAN                                         
        thl the                                                 OBER
        monupdaton ECONOMY                                      OCT2020
    OBER 2020
    OCT
         Published November 2020
   monthly updates
   on the Ethiopian Economy
                               TTabable ofle of  
                              ContentsContents
                        1. Introduction of New Currency Notes
                                  3
                          2. Outlook on Economic Growth
                                  4
                         3. Continued Devaluation of the Birr
                                  4
                           4. Desert Locust Invasion
                                  6
    OBER 2020         5. Developments in Price Levels and Inflation
    OCT                           6
                   6. Developments in Inflow of Foreign Direct Investment
                                  7
                                  2
                                                                                                                          monthly updates
                                                                                                                 on the Ethiopian Economy
                                                        1.1.  Introd  Introduction ofuction of  
                                                     NNew Currency New Currency Notesotes
                 On September 21 Ethiopia has begun circulating               The impact of the currency note changes on 
                 new currency notes.  The last such change took               corruption is not clear since, except for petty 
                 place more than 20 years ago. For the first time in its      corruption, most corruption goes through financial 
                 history the country also introduced the 200-Birr note.       institutions. Even when the corrupt money changes 
                 Three months were given to exchange old notes with           hands, there is nothing that bars the money from 
                 the new ones. Ethiopian authorities announced that           being deposited into bank accounts due to lack 
                 the new design and security features on the new              of a strong tracing, monitoring and accountability 
                 Birr notes will prevent counterfeiting.  In addition to      system. In addition, the idea of reducing inflationary 
                 preventing/reducing counterfeiting, the change of            pressures through change of currency notes does not 
                 currency notes is claimed to reduce the amount of            hold much water. This is because there are several 
                 money that is circulating in the economy outside the         key drivers of inflation in Ethiopia such as currency 
                 banking system and reduce inflation. In addition, the        devaluation, lack of capacity and low productivity 
                 change is aimed at deterring cash hoarding that is           in the economy to produce necessities in adequate 
                 thought to enables corruption and illegal business           quantities, excessive injection of money into the 
                 and transactions to thrive.                                  economy for instance through direct advances to 
                                                                              the government by the central bank, etc. Even in the 
                 One immediate positive impact of the change of               case of direct advance by the central bank to cover 
         OBER 2020the currency notes has been its ability to draw the         budget deficits (‘printing money’), most of the new 
         OCT     unbanked population to open and use bank accounts.           money that is injected into the economy takes the 
                 For instance, within one month of the introduction of        form of electronic entries in bank accounts and not 
                 new currency notes, the government reported that             currency notes.
                 at least 1.3 million previously unbanked Ethiopians 
                 have handed in their old banknotes and opened a              Another justification for the change of the currency 
                 bank account from which they can withdraw the                notes was to reduce the amount of money that 
                 new notes.  According to the World Bank, only 35%            is circulating outside the banking system in the 
                 of Ethiopian adults were said to have bank accounts          country, which is estimated at around 11% of the 
                 in 2017, putting Ethiopia far behind other African           total and about 109 billion Birr for the fiscal year that 
                 countries such as Kenya, where the rate is 82%. A            ended in July 2020. The amount of money outside 
                 recent report by the government indicates that over          of the banking system can be explained by the fact 
                 the past year, the number of accounts in the country         that most of the Ethiopian population uses physical 
                 has increased by 31%.  Despite the progress, the             cash for transactions.
                 fact that half of the population still does not have a 
                 bank account indicates that a lot remains to be done 
                 to further reduce the proportion of the unbanked 
                 population in the country.
                                                                                             New Currency Notes. 
                                                                                             Source: ethiopianmonitor.com
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       monthly updates
       on the Ethiopian Economy
                                             2.2. Outlook on E Outlook on Economic Growthconomic Growth
                   The Ethiopian economy had registered a sustained                  Given the estimated population growth rate of 2.6 
                   and one of the fastest growth rates in the world for              percent per year, the above GDP growth projection by 
                   about 15 years – with GDP growth rates averaging                  IMF implies that real per capita income of Ethiopia 
                   about 10 percent per year between 2004-2018. This                 is expected to contract during 2020 and 2021.  
                   resulted in 6-fold increase in the per capita income 
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                   of the population which stood at US$ 850 in 2019 .                The projections of the Ethiopian Government have 
                   There has, however, been a slow-down of GDP growth                been more optimistic compared to the World Bank 
                   particularly since 2018 and very pronounced in 2020               and IMF. It has been stated that Ethiopia’s economy 
                   due to the impact of the coronavirus pandemic.                    grew by 6.1 percent in the 2019/20 fiscal year that 
                   Earlier in 2020, the World Bank had projected the                 ended in July. It is to be noted that, the 10 Years 
                   Ethiopian economy to grow by 6.3% in 2020, which                  Perspective Development Plan (2019/20-2029/30) 
                   was later adjusted to 4% percent for the fiscal year              sets a target of 10.2 percent average GDP growth 
                   ending in July 2020 and 0% for the current fiscal                 rates over the 10 year period in order to meet its 
                   year. The Global Economic Outlook 2020 published                  target of raising the per capita income of the country 
                   in October by IMF projected that the growth rates                 to US$ 2,220 by 2030.
                   will decline sharply to 1.9% in 2020 and 0% in 2021 
                   and growth returning to pre-crisis rates only in 2022.  
         OBER 2020
         OCT                          3.  Continued3.  Continued Devaluation of the Birr Devaluation of the Birr
                   Over the course of October 2020, the Central Bank of              a ‘managed floating’ exchange rate regime. which 
                   Ethiopia (CBE) has continued the steady devaluation               means that the exchange rate has no predetermined 
                   of  the  Ethiopian  Birr.  The  official  exchange  rate          path and thus it is allowed to fluctuate from day to 
                   between the Birr and US$ was devalued by 2                        day, with the authorities occasionally intervening 
                   percent between October 01 and 31. (The currency                  in the foreign exchange market through the buying 
                   was devalued by 1.4 percent in September 2020.)                   and selling of currencies. However, during all these 
                   Between October 31, 2019 and October 31, 2020, the                years, the official exchange rate in Ethiopia has been 
                   currency was devalued by a whopping 27.6 percent.                 fairly stable with about 5% nominal depreciation 
                   The discussion below provides background to these                 per year with exceptions of a few episodes of 
                   developments and their implications.                              major devaluations (with not even single instance 
                                                                                     of    appreciation).  Consequently,  the  IMF  to 
                   For close to three decades, the Ethiopian                         categorizes the exchange rate regime as a crawl-
                   Government has been implementing what it calls                    like arrangement, i.e. not ‘managed float’.
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                    https://www.worldbank.org/en/country/ethiopia/overview
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