By V. E. K. Madhushani, Jadetimes News
Economic Impact Expected as Government Implements New Measures
The value of Ethiopia's currency, the birr, has fallen by 30% against the US dollar following the government's decision to relax currency restrictions, according to the Commercial Bank of Ethiopia, one of the country's largest banks. This significant policy shift aims to secure a $10.7 billion loan from the International Monetary Fund (IMF) and the World Bank.
The Ethiopian government has reversed its long standing policy of fixing the exchange rate in a bid to attract much needed financial aid. This move has been met with apprehension by many Ethiopians, who fear it will lead to a sharp rise in the cost of living, particularly as inflation is already high. The country has faced chronic foreign currency shortages, exacerbated by a brutal two year civil war in the northern Tigray region, which ended in 2022, and ongoing conflicts in other areas, making it challenging to attract foreign investment.
Under the new policy announced by the central bank, the value of the birr will now be determined by the market. This change comes as negotiations between the Ethiopian government and the IMF reach their final stages. According to Reuters, the IMF has been advocating for a series of reforms, including floating the currency, as a prerequisite for the bailout. The discussions also involve restructuring Ethiopia's external debt, which stands at approximately $28 billion.
Mamo Mehretu, the head of the central bank, stated on Monday that the country is immediately introducing a competitive, market based foreign exchange regime, marking the most significant policy shift in half a century. This change allows commercial banks to buy and sell foreign currencies at negotiated prices.
Historically, similar devaluations of the birr have led to sharp spikes in the cost of food and other goods, especially imported items. To mitigate the impact of this transition and prevent inflation and market instability, the Ethiopian government has pledged to provide subsidies for low income workers.
One of the central bank's reasons for implementing the new policy was the rampant "unanchored" parallel market, where the dollar was costing double the official rate before the policy change. Importers often had to rely on the parallel market to acquire dollars due to the chronic shortage of foreign currency, meaning some higher costs had already been priced in.
However, there are concerns that the birr's value might continue to fall below the rate it was fetching on the parallel market, further exacerbating economic challenges.
