Addis Ababa, Ethiopia – In a bold move to stabilize its economy and attract foreign investment, Ethiopia has announced plans to float its currency, the birr, as part of a comprehensive macroeconomic reform strategy. Prime Minister Abiy Ahmed outlined the new policy, marking a significant shift from the country’s long-standing managed floating exchange rate system.
For years, Ethiopia has grappled with a managed exchange rate that has led to a chronic shortage of U.S. dollars, vital for importing goods and repatriating profits for foreign investors. This shortage has hampered the country’s economic growth and deterred private sector investment.
In a detailed policy statement posted on X, formerly known as Twitter, Prime Minister Abiy emphasized that moving to a market-based exchange rate regime is essential. He stated, “A market-based FX regime is critical to relieving currency shortages, removing constraints to private sector investment and growth, and aligning the prices of imported and exported goods and services with market realities.”
The announcement comes on the eve of a significant meeting with the International Monetary Fund (IMF), where Ethiopia’s request for a new financing program will be a key topic of discussion. Bloomberg News reported on July 25 that the IMF is expected to deliberate on this request, which could unlock over $10 billion in financing for Ethiopia in the coming years.
Prime Minister Abiy has been vocal about the anticipated benefits of these negotiations. He told parliament that successful talks with the IMF and the World Bank would bring substantial financial support, essential for implementing these sweeping reforms.
The government’s reform agenda, detailed in the ‘Macroeconomic Reform Program Policy’ statement, includes several critical changes beyond the exchange rate shift. These include:
- Interest-Based Monetary Framework: Introducing an interest-based system to enhance monetary policy effectiveness.
- Fiscal Policy Adjustments: Implementing significant changes in fiscal policy to improve budget management and economic stability.
- Debt Management Reforms: Overhauling government debt management to ensure sustainable economic growth.
The policy statement underscores the collaborative efforts with international development partners like the IMF and the World Bank. “Our economic reform program, supported by the International Monetary Fund, the World Bank, and other significant development partners, is projected to deliver substantial benefits and outcomes to our economy,” reads the statement.
Banking industry insiders have long anticipated this shift to a market-based exchange rate regime, especially in the final stages of government negotiations with the IMF. The new policy aims to address imbalances in the balance of payments and provide numerous additional benefits, including fostering a more conducive environment for private sector growth and investment.
As Ethiopia embarks on this new economic path, the global community will be watching closely to see how these reforms unfold and their impact on the country’s economic landscape. The move to float the birr marks a pivotal moment in Ethiopia’s efforts to modernize its economy and integrate more fully into the global market.
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