Ethiopia’s central bank governor calls currency float ‘transformative’

Ethiopia’s move to allow its currency to be traded on the open market instead of at a fixed rate could have a “transformative” impact on its economy, the country’s central bank governor told Semafor Africa.

The central bank floated the birr currency in late July. The policy switch enabled Addis Ababa to secure loans from the International Monetary Fund and the World Bank.

Mamo Mihretu, a former World Bank official, has led the bank since January 2023. He has played a prominent role in overseeing the liberalization of the country’s economy under Prime Minister Abiy Ahmed.

Mamo discussed the currency float in this exclusive interview.

💡 How is the reform going to impact foreign investors?

Ethiopia’s foreign exchange regime has been in need of reform for quite some time, and the reform of the foreign exchange regime boldly addresses some of the economy’s most significant and long-standing distortions.

We have approached the reform in a careful and comprehensive manner. Not only are we moving to a market-based determination of the rate, but we are also introducing sweeping reforms that improve the business environment in very consequential ways.

💡 What measures will be taken to protect those most affected by the policy change?

On near-term challenges, we are undertaking the reform after careful and comprehensive preparations. Amongst other things, the government is temporarily subsidizing some essential imports — including fuel, fertilizers, medicine and edible oil — to reduce the immediate adverse impacts on the general population, especially low-income households.

💡 How will Ethiopia’s high inflation be addressed?

We are mindful of some of the natural fears about the inflation following the policy shift and of comparisons being made with other African countries that implemented exchange rate adjustments. But Ethiopia’s circumstances are distinctly different and should not lead to misleading comparisons.

Ethiopia’s current macroeconomic environment is marked by very restrictive monetary conditions, including very low growth rates for both broad money and base money growth, as well as strict monitoring of direct advances to the government.

💡 The value of the birr has fallen by approximately 90% in less than a month and inflation is going up. Do you anticipate any fallout?

Taken together, the FX reforms represent a comprehensive set of measures that can play a truly transformative role for the Ethiopian economy.

We believe that this reform could be as transformative for Ethiopia as it has been for many other emerging markets, such as India in 1991, that shifted from heavily controlled regimes to more market determined systems.