Addis Ababa, Ethiopia – Ethiopia’s currency, the birr, has depreciated by 30% against the US dollar following a major policy shift by the government to ease currency controls. The Commercial Bank of Ethiopia announced this move as part of efforts to secure a $10.7 billion loan from the International Monetary Fund (IMF) and the World Bank by abandoning the long-standing fixed exchange rate system.
This significant change aims to address the country’s severe foreign currency shortages, a problem exacerbated by a recent two-year civil war in the Tigray region and ongoing conflicts in other areas, which have deterred foreign investment. The central bank has declared that the birr’s value will now be determined by the market, aligning with the IMF’s requirements for economic reforms, including the adoption of a floating currency system as part of the bailout conditions.
Mamo Mehretu, the central bank governor, announced on Monday that Ethiopia is implementing a market-driven foreign exchange system, marking the most significant policy change in fifty years. This new approach allows commercial banks to set foreign currency prices through negotiation, moving away from the previous fixed-rate system.
Many Ethiopians are concerned that this move will lead to a steep increase in the cost of living, especially with inflation already high. Historically, devaluations of the birr have resulted in sharp price increases for food and other imported goods. To mitigate these effects and prevent economic instability, the government has pledged subsidies for essential goods like petrol and additional support for low-income workers.
One of the driving factors for this policy change is the thriving parallel market, where the dollar was traded at twice the official rate due to the chronic foreign currency shortage. Importers often turned to this unofficial market, which has already driven up some costs. There are concerns that the birr’s value might fall even further, potentially surpassing the parallel market rates.
The ongoing negotiations with the IMF and the World Bank also focus on restructuring Ethiopia’s external debt, which stands at around $28 billion. The shift to a floating exchange rate system is part of broader economic reforms demanded by the IMF to stabilize the country’s economy and secure the much-needed financial aid.
As Ethiopia navigates these significant changes, the government’s ability to manage the economic transition will be crucial in determining the country’s financial stability and growth prospects. The coming months will be pivotal as the market adjusts to the new currency system and the impacts of these reforms become more apparent to everyday Ethiopians.
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