Addis Ababa (AFP) – Cash-strapped Ethiopia eased foreign exchange curbs on Monday as part of a broad economic reform package, coinciding with the International Monetary Fund’s approval of a loan to the Horn of Africa nation seeking a multibillion-dollar bailout. The value of the local currency, the birr, plunged by around 30 percent following the move by the country’s central bank.
“The reform introduces a competitive market-based determination of the exchange rate and addresses a long-standing distortion within the Ethiopian economy,” the National Bank of Ethiopia (NBE) said in a statement. Africa’s second most populous country is pinning its hopes on a rescue package of at least $10.5 billion from external lenders, including the IMF, but negotiations have been long and fraught. The IMF board on Monday approved a four-year loan programme worth around $3.4 billion to support the reforms, with around $1 billion disbursed immediately.
“This is a landmark moment for Ethiopia,” and the loan is a testament to the country’s “strong commitment to transformative reforms,” IMF Managing Director Kristalina Georgieva stated. Analysts had noted that the IMF was demanding several reforms of Ethiopia’s state-controlled economy, including floating the currency, in order to unlock the funding. Battered in recent years by several armed conflicts, the Covid pandemic, and climate shocks, the country is grappling with about $28 billion in external debt, sky-high inflation at around 20 percent, and a shortage of foreign currency reserves.
Under the shift to a market-based exchange rate regime, the NBE stated that “banks are henceforth allowed to buy and sell foreign currencies from/to their clients and among themselves at freely negotiated rates.” The central bank indicated that it would make “only limited interventions to support the market in its early days and if justified by disorderly market conditions.”
Following the announcement, the leading Commercial Bank of Ethiopia, which is wholly owned by the state, reported that the US dollar was buying 74.73 birr, compared to 57.48 on Friday. Ethiopia has a highly active black market for currency trading, with the value of the birr at about half of the previous official rate, which used to be set daily by the NBE. The central bank also foreshadowed the opening of Ethiopia’s securities market to foreign investors, stating that details would be disclosed in the near future.
Among other measures, the NBE indicated that it would allow foreign exchange to be retained by exporters and commercial banks to boost supplies to the private sector and announced the introduction of non-bank foreign exchange bureaus. The government has also decided to temporarily subsidize some essential imports such as fuel, fertilizers, medicines, and edible oils, as well as provide financial support for low-income families and bolster public-service salaries. It stated, “The FX reforms…represent a comprehensive set of measures that will support Ethiopia’s current stage of development and its increasing integration with the rest of the world.”
When he took office in 2018, Prime Minister Abiy Ahmed pledged to embark on reforms of Ethiopia’s closed and state-dominated economy, but progress has been slow. In a statement on Sunday, Abiy affirmed that Ethiopia’s reform agenda “will lay the foundation for strong, private sector-led inclusive economic growth and job creation.” He mentioned that the economy had registered “robust” growth over the past six years, with an average rate of 7.1 percent from 2019 to 2023.
However, more than 21 million people, or about 18 percent of Ethiopia’s population, rely on humanitarian aid as a result of conflict and climate disasters such as flooding or drought, according to UN figures. Senior Ethiopian economist Gutu Tesso warned that the forex reforms could “exacerbate the economic crisis” by driving up inflation and would not, in themselves, attract foreign investment, which required “ensuring reliable peace and security.”
Conversely, business analyst Samson Berhane expressed a more optimistic view, claiming that the “financial cushion” from international lenders would help stabilize the birr and that the gap between the official and black market rates could narrow. He suggested that this move could also benefit exports, including mining. The landlocked country’s credit rating was downgraded to a partial default in December by the international agency Fitch after missing a $33 million coupon payment on a Eurobond. The two-year conflict in the northern Tigray region, which ended in November 2022, led to the suspension of numerous development aid programs and budget assistance.
© 2024 AFP
