Cash-strapped ased foreign exchange curbs on Monday as part of a broad economic reform package as the International Monetary Fund approved 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% after 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 International Monetary Fund’s board on Monday approved a four-year loan programme worth around $3.4 billion to support the reforms, with around $1 billion immediately disbursed.
“This 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 said in a statement.
Analysts had said 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-19 pandemic and climate shocks, the African country has about $28 billion of external debt and is grappling with sky-high inflation at around 20% and a shortage of foreign currency reserves.
Under the shift to a market-based exchange rate regime, the National Bank of Ethiopia (NBE) said “banks are henceforth allowed to buy and sell foreign currencies from/to their clients and among themselves at freely negotiated rates”.
The central bank would, it said, make “only limited interventions to support the market in its early days and if justified by disorderly market conditions”.
More integration
After the announcement, the leading Commercial Bank of Ethiopia, which is wholly owned by the state, said 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, saying details would be disclosed in the near future.
Among other measures, it said 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 subsidise some essential imports such as fuel, fertilisers, medicines and edible oils, as well as provide financial support for low-income families and bolster public-service salaries, it said.
“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.’
Senior Ethiopian economist Gutu Tesso warned 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”.
But business analyst Samson Berhane was more optimistic, saying that the “financial cushion” from international lenders would help stabilise the country’s currency and that the gap between the official and black market rates could narrow, while the move could also help exports including mining.
Published - July 31, 2024 08:26 am IST
