How Bitcoin And Green Energy Can Save Ethiopia’s Economy

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The future headquarters of the Commercial Bank of Ethiopia CBE in Addis Ababa, Ethiopia.

Xinhua News Agency via Getty Images

Selamawit Girma, mother of three who lives in Ethiopia’s capital Addis Ababa, is concerned.

Her monthly salary of 4,000 birr (about $ 91) is no longer as high as it used to be. Inflation surpassed 20% in Ethiopia last year and is still rising – to 24.5% in June – as the country struggles to contain the economic fallout from the Covid-19 pandemic.

“I am very afraid of the current costs [of things]“She told the Addis Standard.

“I’m afraid of being on the street with my children. The prices of housing rents, transportation, groceries and non-food items are rising … which the government seems to have very little to do about. ”

It is not for lack of experimentation. Ethiopia has one of the most stable and diverse economies in Africa and benefits from a future-oriented government that has consistently achieved the development goals for its 117 million inhabitants. The number of Ethiopians living below the poverty line has more than halved since 2000.

No matter what progress is made domestically, Ethiopia exists within a global financial order that puts the US dollar – the only reserve currency in the world – at the forefront.

The provision of these dollars is determined exclusively by the US Federal Reserve, which has the sole task of protecting the economic interests of the USA.

And while printing trillions of dollars to stimulate demand appears to be helping America – at least in the short term – the practice is having a devastating impact on poorer countries whose currencies are directly or indirectly pegged to the USD.

“The Fed’s job is to solve the US currency problems and not” [those of] other countries, ”said a spokesman for Project Mano, an Ethiopian lobby group that wants Addis Ababa to look into whether Bitcoin – a decentralized cryptocurrency with a fixed supply – can break the inflation cycle.

“This is our problem because we are dependent on another country’s monetary policy. They don’t do it out of spite or to hurt us … It is our own choice to hold dollars. “

It is not difficult to understand how ultra-loose monetary policy in the West can harm developing countries.

The not so omnipotent dollar

The Ethiopian National Bank currently holds foreign exchange reserves worth around 3 billion US dollars – the majority of it in USD.

These stocks do not grow proportionally as the Fed prints more and more money, so inflation gradually undermines their real value – or purchasing power.

At the same time, the Ethiopian government is monitoring the steady devaluation of its own currency, the birr, to prevent the country’s $ 12 billion trade deficit from widening. (The devaluation of a currency makes domestically produced goods more affordable on the international stage, thus boosting exports and helping to balance the books.)

Taken individually, each of these trends would be manageable.

However, if the value of a country’s domestic currency and the value of its foreign exchange reserves decline simultaneously, there is a real and present risk of economic collapse. Ethiopia needs to preserve the value of its USD holdings – or an equivalent reserve currency – to protect itself from domestic hyperinflation.

And that is getting more and more difficult – not only because of the endless printing of money by the Fed, but also the fact that Ethiopian Airlines, one of the country’s main currencies, faces an uncertain future thanks to Covid-19.

With Ethiopia’s GDP rate now growing four times slower than its inflation rate, the country is staring at insolvency down the barrel of a gun.

So what to do

It could just buy more dollars. This is China’s approach: it is believed that more than half of its foreign exchange reserves are worth 3.2 trillion. USD to USD, which it uses to manipulate the USD / CNY exchange rate and get exports rolling off the shelves.

The problem is that developing countries like Ethiopia cannot afford to pile up trillions of dollars.

This leaves three options: hope that America will stop devaluing the world reserve currency; find new, reliable USD sources; or diversify the state’s holdings beyond the dollar – preferably by acquiring an asset with a fixed offering that cannot be tampered with by foreign governments. Enter bitcoin.

“The introduction of Bitcoin, or cryptocurrency in general, is scary for any government, but … our project is mainly aimed at finding solutions to solve forex problems that the government may face,” explained Project Mano. “As everything else they hold on offer grows – including gold – we suggest” [they find] something that doesn’t grow as an experiment. “

Project Mano’s long-term vision spans three areas: Bitcoin mining; Hold bitcoin; and linking Bitcoin to the Birr.

The latter two would theoretically solve the problem of a depreciating reserve currency – but only if Bitcoin fulfills its promise and matures into a globally recognized asset class. This, the lobbyists admit, is viewed by the government as a “risk”.

A safer bet is their suggestion to mine and monetize Bitcoin – especially given Ethiopia’s unique energy landscape and development status.

An expensive green revolution

The East African country has an abundant supply of renewable energy: 90% of its electricity is already supplied by domestic hydropower plants, the rest for the most part comes from wind, sun and geothermal energy.

That is only a fraction of its future potential. The government hopes to quintuple renewable generation capacity to 25,000 megawatts (MW) by 2037, 6,500 MW of which will come from a flagship project: the Grand Ethiopian Renaissance Dam (GERD), located in the Blue Nile.

The Grand Ethiopian Renaissance Dam (GERD), a 145 meter high and 1.8 kilometer long concrete colossus, … [+] is to be the largest hydropower plant in Africa.

AFP via Getty Images

All in all, the full potential of the renewable projects under consideration in the country is estimated at up to 60,000 MW.

And for normal Ethiopians, the stakes are even higher.

Success in the green energy sector is crucial from a development point of view, as only 48% of the population is currently connected to the electricity grid.

Electricity exports have also been identified as a much-needed foreign source of income: Sudan and Djibouti paid $ 66 million for Ethiopian energy in 2019.

But infrastructure expansion is not a panacea in countries like Ethiopia. Price volatility, fluctuating demand and logistical challenges cloud the water, make it difficult for investors to predict returns and ultimately slow the pace of progress.

Alex Gladstein, Chief Strategy Officer at the Human Rights Foundation, explained the problem – and one possible solution – in a recent essay for Bitcoin Magazine:

“Billions of people in developing countries face the problem of stranded energy. In order for their economies to grow, they need to expand their electrical infrastructure, a capital-intensive and complex endeavor. But when they … build power plants to use renewable energies. “In remote places, that power often has nowhere to go.”

He continued, “This is where Bitcoin could be a breakthrough incentive. New power plants, no matter how far away, even without transmission lines, can generate instant income by directing their energy into the Bitcoin network and converting sunlight, water or wind into money … With Bitcoin, any excess energy can be directed into mining until the communities to unlock the facility. “

In short, this is Project Mano’s most compelling proposition.

Free bitcoin faucets

His analysis suggests that only 5% of the GERD’s electricity generation under the prevailing grid conditions would provide 2,100 BTC per year. That’s an annual return of $ 70 million at the time of writing versus a one-time cost of capital of $ 105 million to acquire 10,000 S19 ASIC bitcoin mining machines.

In contrast, it would cost Ethiopia an estimated $ 1.7 billion to build the infrastructure needed to export GERD energy to its neighbors.

Crucially, the government doesn’t need to mine Bitcoin itself, nor take any risk by holding it.

“Even if Ethiopia doesn’t start mining right away, it could be a good energy exporter for mining companies that are happy to help build infrastructure for shared revenue,” explained Project Mano, referring to Ethiopia’s low electricity costs for businesses ($ 0.02 / kWh versus USD 0.10). in Nigeria and $ 0.18 in Kenya).

“It could just sell electricity … Cheap electricity, clean energy, and supportive government policies are attractive to any miner.”

The spokesman admitted that GERD itself may not be the best poster child for Bitcoin adoption in Ethiopia.

The project has been mired in controversy for years, with Egypt and Sudan – two downstream neighbors – threatening retaliation if they fear their water supplies are negatively affected by the dam. Tensions rose again this month as it was confirmed that Ethiopia had begun a second fill of the reservoir.

However, GERD is just one of countless renewable energy projects in the country – each of which would be “less uncomfortable avenues for the government if they take us seriously.”

Plus, with Cairo and Khartoum now looking to negotiate a solution, it’s not difficult to envision a bitcoin-sharing deal that will settle the matter once and for all – and at no direct cost to Addis Ababa.

There is no denying that Bitcoin is not a talking point for most Ethiopians today.

But it is also undeniably true that their economy is struggling – at least in part because of monetary policies thousands of miles from Africa and decided without regard to the wellbeing of the people.

The Ethiopian government has an enviable track record of adopting new technology and promoting new ideas.

It is time for Bitcoin to enter the political discourse in Addis Ababa.

“All we ask is that [the government consider] Diversification into other, uncorrelated portfolios, ”emphasized Project Mano. “If the US dollar falls more than expected, a plan B is not a bad idea.”