6. The Monetary Arrangement
Eritrea
used the Birr until it introduced its own cur rency, the
Nakfa, on November 8, 1998. The relevant provision for this
agreement was signed in the Protocol Agreement on
Harmonization of Economic Policies on September 1993. It
provides as follows:-
Article
1
The Use
of the Ethiopian Birr until Eritrea has its own currency.
In so far as a common currency is in use, the Contracting
Parties agree:
1.
2. To
harmonize exchange rate policies including consideration of
pooling of reserves with the aim of establishing uniform
exchange rates within the currency area.
3.
4.
5. To
harmonize interest rate structures in both countries.
6.
7.
8. To
work out a mechanism by which the increase in money stock
is consistent with the growth and inflation objectives of
the two countries.
9.
10.
11. To
work out a scheme to synchronize policies related to
foreign exchange surrender requirements, allocation of
foreign exchange to importers, capital flows and external
debt management.
12.
We have
been hearing and we will yet hear allegations that this
arrangement favoured Eritrea more than it did Ethiopia. How
a country that uses someone else's currency can be deemed
an exploiter is yet to be convincingly explained. It is
like the US feeling raped because its dollar is spread all
over the world.
In actual fact, throughout its use of the Birr, Eritrea was
a victim of the Ethiopian monetary policy as it had no say
in its formulation. Here, again, differences in economic
policy between the two states created incongruities in the
use of the Birr. On this topic we refer to an Eritrean
economist's expert opinion, that of Dr. Woldai Fitur of the
IFC, who says:-
"....it was clearly Ethiopia that benefited more from
arrangements concluded between the two countries. For
instance, the arrangements in the de facto currency union,
which did not allow Eritrea a voice in Ethiopia's conduct
of monetary policy, worked more in favour of Ethiopia. All
seigniorage associated with issuing new Birr notes accrued
to the National Bank of Ethiopia, while the costs
associated with the overvalued exchange rate and
unreasonably high interest rates imposed by the Ethiopian
Government on the Birr area spilled over to the Eritrean
economy, forcing Eritrea to adopt an independent exchange
and interest rate structure.
It is important to appreciate that this interest and
exchange rate structure was necessitated by the divergent
economic (fiscal, monetary, trade, investment, etc.)
policies that the two countries have chosen to pursue.
Immediately after liberation, Eritrea adopted liberal
trade, investment, and financial and foreign exchange
regimes. These policies were quite different from those of
Ethiopia. Under such circumstances, it behooved Eritrea to
issue its own currency and pursue independent interest and
exchange regimes for an effective management of its
economy. Ethiopians should not have any reason to resent
Eritrea's independent monetary, interest and exchange rate
policies. The development of an active black foreign
exchange market, which hadn92t existed for decades, was the
natural consequence of the distortions by Ethiopia's
foreign exchange policy. The Eritrean Government has in no
way contributed to the development of this black market and
should not be blamed for it. Moreover, Ethiopia paid in
Birr for all Eritrean exports, including re-export of goods
imported from third parties in hard currency. In view of
this, it was Ethiopia and not Eritrea that benefited more
form the de facto currency union. (Eritrea Profile, Vol. 5
No 1, August 15, 1998).
The Nakfa-Birr "controversy" is actually an Ethiopian
creation. The accusation leveled on Eritrea by the
Ethiopian government and media is that it sought to force
upon Ethiopia a Nakfa convertible with the Birr on parity
and that it insisted that both currencies circulate freely
in both countries. Why the Ethiopians would think such a
suggestion, though it was never made, a blasphemy cannot be
rationalized. However, the records show that Eritrea never
presented such a proposal or suggestion to the Ethiopian
government. In March, 1997, the National Bank of Eritrea
had entertained the following three points as payment
options that "could be considered depending on the level of
political commitment for closer cooperation and prospects
for accelerated harmonization of economic policies of the
two countries". These options were:
1.
2. a
foreign exchange-based payment system, as is the case with
the rest of the world;
3.
4.
5.
freely convertible Nakfa-Birr payment system in which trade
between the two countries could be conducted with or
without opening a letter of credit with a bank; and
6.
7.
8. a
partial convertibility of Nakfa-Birr system in which trade
between the two countries could be conducted only by
opening a letter of credit with a bank. (Bank of Eritrea,
"Progress Towards the Introduction of Nakfa and the
Disposition of the Birr, March 13, 1997, Asmara, Eritrea.
P.14.)
9.
The Bank
of Eritrea did not make a secret of its preference for the
second option which it saw as "the most appropriate for
stimulating rapid expansion of trade and greater economic
integration between Eritrea and Ethiopia." By the "free
convertibility" of Nakfa-Birr in this option, it was not
suggesting parity or the free circulation of both
currencies. It was, rather, to put it in layman's terms,
giving traders in either country the opportunity to agree
on the use of the currency of their choice for settlement
and to do so through the intermediary of banks in both
countries. Any imbalances accruing from such a practice,
according to this option, would be settled in foreign
currency through the banking systems of Eritrea and
Ethiopia. The assumption here, of course, was that the
trade would be carried out without resorting to the opening
of letters of credit.
In the joint committee meeting of 19 November, eleven days
after the Nakfa had been introduced and the new Ethiopian
Birr put into effect, the Ethiopian delegation presented
the LC option as its final preference except in limited
petty-trade. The US dollar was to be the official medium of
exchange between the two countries. Later, the Ethiopians
stipulated that the border petty-trade was not to exceed
the value of 2000 Birr in each instance. The Eritreans felt
that the Ethiopian preference was not in the interest of
the people of both countries as it would encumber the
traditional free flow of goods.
When the Nakfa came into operation, Ethiopian reaction was
unexpectedly and astonishingly violent. Holders of that
currency were harassed at all Ethiopian points of entry,
the Nakfa was confiscated and sometimes torn or burned and
the atmosphere of the complete break-down of trade created
by Ethiopian authorities. In fact, trade from Eritrea to
Ethiopia came to a virtual halt.
Nothing approaching that level of irrationality was seen
prior to the Nakfa incident - not even at the time of
Eritrean independence, especially by the TPLF cadres and
their supporters. Suddenly, pictures of an economically
weak Eritrea trying to get an easy ride on the back of
Ethiopia started to be painted. Eritrea was now "the
exploiter", a bully that "coerced" Ethiopian authorities
into unbalanced and unfair agreements". The idea,
apparently, was to teach Eritrea the lesson that (the old
fallacy) its existence was irrevocably and forever tied to
Ethiopia's abundant resources; that what amounted to a
trade embargo, would bring it down to submission.
The
mood in Eritrea was different.
The old
traditional trade ties with Ethiopia, which were
re-enforced by the mutual friendship apparent at
independence had, in a way, clouded Eritrea's vision in
many ways. So, the strain in trade relations following the
Nakfa, though obviously lamentable, was a good thing, as it
widened the nation's perspective and alternatives. That was
how the incident was assessed and explained to the Eritrean
public.
F.
Concluding points
In the
areas of trade and currency policies, the post-1991
agreements between Eritrea and Ethiopia did not work and,
in fact, led to some confrontations. In other areas,
including the issue of citizenship, no insurmountable
problems were encountered and, one may say, they were
generally successful.
We now hear a lot of "learned analysis" surmising that the
root cause of the border crisis of May 1998 is Eritrea 's
"failed" economy; that "the Badme Incident" was a tactic by
the Eritrean Government to divert its people from its
internal problems....etc. These are all Ethiopian
allegations, so often repeated and so made wide-spread
through the relentless use of every media, propaganda and
diplomatic resource at their disposal that they, initially,
confused quite a few people.
The facts are different. The latest economic indicators
issued by the independent studies of the IMF and the World
Bank attest to the following:-
The IMF Executive Board, which met on July 13, 1998, issued
its official findings on July 16, 1998. Here it expressed
its concern over the border conflict but, otherwise, fully
endorsed the Eritrean government's policies and practices
in every field of economic activity. Eritrea's "impressive
progress made in economic reconstruction and social
rehabilitation during the past six years" was welcomed by
the Directors. They also welcomed the "further progress"
made in 1997 "particularly in implementing structural
reforms, reducing the fiscal deficit and successfully
introducing the Nakfa." They also commended the
"authorities92 strong commitment to strengthen
macroeconomic performance and reform the institutional
framework." Looking ahead, the Directors saw the present
conflict as an impediment to the Eritrean authorities92
plans of "further reducing macroeconomic imbalances and
accelerating growth." They also noted the adverse effects
the conflict can play on the nation's fiscal policy, in
spite of "the commendable reduction of the budget deficit
in 1997." (IMF, No.98-277, July 16, 1998.)
The IMF further noted the boost that the private sector got
through the privatization of 700 small-scale and 39 big and
medium-scale manufacturing enterprises. It further stated,
"Prices were decontrolled while differential interest rates
between private and public sectors were eliminated."
Consequently, the IMF pointed out, "the role of the private
sector was boosted, resulting in buoyant growth in
manufacturing and services exports."
With the benefit of these reforms, the report continued,
"real output growth averaged 7 percent during 1993-96 and
rose to 8 percent in 1997, translating into significant
growth in per capita income".
The report also found the annual inflation rate for 1993-96
to have been at less than 4 percent. The reduction of
government expenditure by about 10 percentage points and
the increase in revenues by 6 percentage points was also
noted as a result of both "the completion of some programs
and the intention of the authorities to bring down the
deficit to sustainable levels ", and the "broadening of the
tax base and the ongoing strengthening of the collection
effort respectively". As a result, "the deficit came down
sharply from 16.4 percent in 1996 to 5.5 percent of GDP in
1997". Finally, the report notes, "the medium-term targets
of real output growth of 6-7 percent per annum, annual rate
of 3-5 percent and a built-up of reserves to 5.5 months of
imports are quite ambitious and consistent with the
authorities92 track record of perseverance with
implementation of good economic policies."(IMF,
BUFF/ED/98/105, July 10, 1998.)
The World Bank has more recently also given high marks to
Eritrea's implementation of programs and projects. Last
August, the Bank's representative for Eritrea, Ethiopia,
Somalia and Sudan declared that Eritrea was one of the five
countries in the world with whom the World Bank maintains
exemplary relations. Its "impressive economic performance",
the official also noted, "mainly emanates from its
effective implementation of home-grown development
strategies." (Eritrea Profile, Vol.5 No.24, August 22,
1998.) The virtual absence of corruption in the country and
the safety and stability prevalent even in spite of the
border conflict are invariably mentioned as great assets
for Eritrea's future development.
There is, in short, no evidence whatsoever of the Ethiopian
government's continuous claim that the Eritrean economy is
in dire straits. At the time of writing this paper,
mid-August, 1998, the Nakfa stands at 7.45-7.50 to the US
dollar, still maintaining its pre-conflict levels. At this
particular time (August, 1998), the Ethiopian Birr's
position vis-à-vis the dollar is about the same. The price
of fuel in Eritrea stays constant at 2.80 Nakfa per litre
and bread is available at 0.20 cents Nakfa or about 0.03
cents US apiece, a price maintained since independence.
Whereas it would be self-deceiving to claim that the
conflict is not adversely affecting the Eritrean economy,
the fact that it is still withstanding this adversity
attests to its strong base.
Why, then, would a government that is doing so well on the
economic, social and political fronts, want to start a
border conflict and create problems for itself? Why would
it want to dismantle all of its achievements of the past
seven years?
The answer, definitely, lies somewhere else - on the border
conflict that has its own background and history, not
directly related to the cooperation agreements discussed
above or to the performance of the Eritrean economy.
We now turn our attention to the events leading to the
border conflict of May 6, 1998, where the real cause of the
hostilities lie.