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Ethiopia’s government has allowed its currency to be traded on the open market instead of at a fixed rate as part of reforms aimed at securing loans from international lenders to stabilize its economy.
The birr’s value against the dollar fell by 30% after it was allowed to float on Monday, said the country’s biggest lender, Commercial Bank of Ethiopia. Removing the central bank’s fixed rate is part of sweeping reforms aimed at easing the chronic shortage of foreign currency that have plagued its economy.
The Horn of Africa country hopes the switch will enable it to secure loans from lenders such as the International Monetary Fund and the World Bank. It has been in talks with the IMF to establish a new lending programme.
Ethiopia became the third African economy in as many years to default on its government debt in late 2023. That contributed to its credit rating being downgraded last year to “junk territory” by the Fitch Ratings agency.
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Central bank governor Mamo Mihretu said the reforms formalize a shift that was already happening. He said Ethiopia will receive $13.5 billion in coordinated financing from multilateral lenders and creditors to support the transition.
A financial package of $10.7 billion offered by Ethiopia’s external partners to support the reforms will mitigate the transitional costs and impact of changes, according to Mihretu who said it was the single biggest ever coordinated commitment of support by international partners towards Ethiopia.
Some $2.8 billion in bilateral support is also expected in the form of central bank deposits and swap lines, as well as further financing from the World Bank, the International Finance Corporation, and other multilateral institutions.
Samuel’s view
The currency liberalization is the most eye-catching reform in a raft of changes.
Other key elements of the reforms include ending mandatory foreign exchange surrender requirements for exporters, liberalizing import and capital flow rules, allowing non-bank currency exchanges, and deregulating how commercial banks allocate forex to importers.
Locals receiving remittances will also be permitted to hold foreign currency accounts to have them use an official exchange avenue instead of the informal market.
A key question concerns how this will affect ordinary Ethiopians. A similar move in Nigeria last year, where the naira currency was allowed to float freely, has fueled widespread hardship by contributing to price rises.
Ethiopia’s Prime Minister Abiy Ahmed has said those expected to be impacted by the move will be temporarily supported by way of subsidized fuel and there will be a salary hike for public servants.
And there is a broader sense that the country needed to take this step to kickstart international investment.
Economic analyst Sam Rosmarin, who is based in Addis Ababa, supports the move as a way for Ethiopia to be an attractive destination for foreign investors who have long called for such a move.
“This is necessary economic medicine to satisfy external creditors,” he told me. “The economy is already operating on the parallel market and these reforms will help attract significant foreign investment that is needed.”