Ethiopia’s currency, the birr, has depreciated by 30% against the US dollar following the government’s decision to relax currency restrictions.
This shift, announced by the Commercial Bank of Ethiopia, marks the end of a long-standing policy of fixing the exchange rate. The move aims to secure a $10.7 billion loan from the International Monetary Fund (IMF) and the World Bank.
The decision has sparked concerns among Ethiopians who fear a steep rise in living costs, especially with inflation already high.
The country has been grappling with severe foreign currency shortages, exacerbated by a devastating two-year civil war in the northern Tigray region that ended in 2022, and ongoing conflicts in other areas, deterring foreign investment.
The new policy, introduced by the central bank, shifts the birr to a market-determined value.
Central bank head Mamo Mehretu announced on Monday morning that Ethiopia would adopt a competitive, market-based foreign exchange regime, a significant policy change not seen in half a century. This change allows commercial banks to trade foreign currencies at negotiated prices.
Past devaluations of the birr have led to significant increases in the prices of food and other imported goods. To mitigate the impact of the current devaluation, the Ethiopian government has pledged subsidies for essential items like petrol and additional support for low-income workers.
One of the main reasons for the policy shift was the unregulated parallel market where the dollar was costing double the official rate, forcing importers to turn to this market due to the chronic foreign currency shortage. Analysts report that the IMF has been pushing for several reforms, including the floating of the currency, as a condition for the bailout. Additionally, the ongoing negotiations involve restructuring Ethiopia’s external debt, which stands at around $28 billion.
As Ethiopia transitions to this new policy, there are concerns that the birr may continue to fall below its previous parallel market rate.
