The Impact of Exchange Rate Policy on Ethiopias Healthcare Sector

Floating exchange rates is a term that has become a topic of conversation this past week dubbed a saving grace by some and a catastrophic event by others what is a floating exchange rate and what does that mean for the health sector? A floating exchange rate is a system where the forex market determines a nation’s currency price based on supply and demand relative to other currencies. This differs from a fixed exchange rate, where the government predominantly sets the rate. Previously, the Ethiopian government had adopted fixed exchange rates, which initially boosted GDP growth. However, this policy has recently led to a shortage of foreign currency and a decline in foreign investment, increasing consumer price inflation. From 2012 to 2022, inflation in Ethiopia averaged 15.3%, surpassing the Sub-Saharan Africa regional average of 9.4%. In 2022, the average inflation rate was 33.9% (https://www.focus-economics.com/economic-indicator/inflation-rate/). Floating exchange rate policies are implemented in countries such as Japan, the United States, and Nigeria. While this policy has proven beneficial for some nations, it has been detrimental to the economies of others. Its success depends on the stability of a country’s market; nations with high exports and limited imports tend to thrive, while those reliant on imports with unstable exports often struggle. Ethiopia has been struggling for years with a high import demand and low export potential. The shortage of foreign currency led to significant economic challenges, including inflation and limited foreign investment. This shift from a fixed to a floating exchange rate is a significant economic adjustment with potential implications for the entire market. Potential Benefits: Export Competitiveness: A weaker Birr can boost exports by making Ethiopian products more affordable in foreign markets. This could lead to increased foreign currency earnings and a reduction in the trade deficit. Attracting Foreign Investment: A floating exchange rate can signal to foreign investors that the government is committed to market forces and economic flexibility. This could encourage increased foreign direct investment, bringing in capital and technology. Macroeconomic Stability: A floating exchange rate can act as a shock absorber, helping to cushion the economy from external economic shocks like changes in commodity prices or global financial crises. Potential Challenges: Import Costs: A weaker Birr will make imports more expensive, leading to higher prices for consumers and businesses. This could fuel inflation and erode purchasing power. Currency Volatility: Fluctuations in the exchange rate can create uncertainty for businesses, making it difficult to plan and invest. This volatility can discourage both domestic and foreign investment. Debt Servicing: A weaker Birr can increase the cost of servicing foreign debt, putting pressure on the government’s finances. A floating exchange rate can potentially benefit the health sector by increasing access to medical supplies and equipment. A weaker domestic currency can enhance the competitiveness of Ethiopian exports, leading to increased foreign exchange earnings. This surplus can be utilized to import essential medical supplies and equipment, thus improving the availability of healthcare resources. Additionally, a flexible exchange rate environment might attract foreign investment into the healthcare sector, leading to the establishment of new healthcare facilities, technology transfer, and improved healthcare services. However, the challenges posed by a floating exchange rate in the health sector are equally significant. A depreciated domestic currency typically results in higher import costs, affecting the price of medical supplies and equipment. This can lead to increased expenditure for healthcare providers, potentially reducing access to essential healthcare services for the population. Moreover, healthcare providers might be compelled to raise service prices to offset increased costs, making healthcare less affordable for the general public. The economic uncertainty associated with a floating exchange rate can also deter foreign investment in the healthcare sector, limiting the potential for improvements in the sector. The overall success or failure of the new policy regime will depend on a lot of factors including the government’s macroeconomic policies, the global economic environment, and the stability of the country. Ultimately only time will tell, whether the floating exchange rate becomes a catalyst for improved healthcare access or a stumbling block.