The Curious Case of the Strengthening Birr

By Kebour Ghenna

By all appearances, Ethiopia’s Birr is doing something remarkable. It is strengthening.

The latest foreign exchange auction organized by the National Bank cleared at around 158 Birr to the dollar, lower than previous auctions. Only a handful of banks secured dollars, and yet none appeared eager to bid significantly higher.

This raises an obvious question.

If dollars are so scarce, why weren’t banks willing to pay more for them?

The official explanation is encouraging. Inflation is declining. Fiscal discipline is improving. Foreign exchange inflows are strengthening. 

Confidence is returning. Perhaps.

But markets are rarely driven by official explanations alone.

When traders believe the price of something will rise, they rush to buy it. When they believe the price will fall, they wait.

The banks waited. That tells us something.

It suggests that many bankers do not expect the dollar to become dramatically more expensive in the near future. They may believe that additional foreign exchange will continue to enter the market through future auctions, remittances, donor inflows, and improved export earnings. Why bid 170 Birr today if you believe you can buy dollars at 155 tomorrow?

In other words, the banks may be voting with their wallets. And unlike economists, wallets tend to be brutally honest.

The strengthening Birr is welcome news for some parts of the economy. Importers benefit. Fuel becomes less expensive in local currency terms. Inflationary pressures ease. Businesses dependent on imported machinery and inputs breathe a little easier.

Consumers, too, enjoy a brief reprieve from rising prices.

But every coin has two sides.

A stronger Birr also means exporters receive fewer Birr for every dollar earned. Coffee exporters, flower growers, and manufacturers competing in international markets may find their margins squeezed. The stronger the currency, the harder it becomes for domestic producers to compete against imports.

This is one of the oldest stories in economics.

Consumers celebrate. Producers complain. Governments applaud. Exporters grumble.

The real question is not whether the Birr is strengthening today. The real question is WHY?

If the stronger Birr reflects increased productivity, stronger exports, and rising investor confidence, then it rests on a solid foundation.

But if it is primarily the result of tight monetary policy, reduced domestic demand, and periodic injections of foreign exchange by the central bank, then the story becomes more complicated.

Currencies, like reputations, are easy to improve for a season and difficult to sustain indefinitely.

Meanwhile, the banks have delivered their own quiet verdict.

Faced with the opportunity to bid aggressively for dollars, they declined.

Perhaps they know something.

Or perhaps they are simply behaving as prudent bankers do when they suspect tomorrow’s auction may offer a better deal than today’s.

Either way, their actions tell us more than the speeches.

As always, the market listens politely to policymakers.

Then it places its bets.

Editor’s Note: The article appeared first on the personal FB page of the author 

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