Ethiopian Currency Plummets 30% After Major Policy Change
- Lethiwe Nkosi
- Jul 29, 2024
- 2 min read
The Ethiopian birr has sharply depreciated by 30% against the US dollar following a significant policy shift by the government. This drastic decline comes after the Ethiopian government relaxed its long-standing currency restrictions in a bid to secure a $10.7 billion loan from the International Monetary Fund (IMF) and World Bank.
The policy reversal, which ends decades of fixing the exchange rate, allows the birr to be determined by market forces. This move aims to address Ethiopia's chronic foreign currency shortages and bolster its economy, which has been severely impacted by a brutal two-year civil war in the Tigray region and ongoing conflicts elsewhere.
The Commercial Bank of Ethiopia reported the sharp fall in the currency's value, causing widespread concern among Ethiopians. Many fear that the devaluation will lead to increased living costs, exacerbating the already high inflation rates.
Under the new policy, commercial banks are now permitted to buy and sell foreign currencies at negotiated prices. This shift is part of a broader set of reforms required by the IMF for the bailout package, which also includes restructuring Ethiopia's external debt, estimated at around $28 billion.
Mamo Mehretu, the head of the central bank, announced the introduction of a competitive, market-based foreign exchange regime on Monday. He emphasised that this policy change is one of the most significant in half a century and aims to curb the influence of an "unanchored" parallel market where the dollar was previously trading at double the official rate.
To mitigate the potential impact on low-income workers and prevent further inflation, the Ethiopian government has pledged to provide subsidies. Despite these measures, there are concerns that the birr could continue to fall below the rates seen on the parallel market, adding to the economic instability. Analysts are closely monitoring the situation as Ethiopia navigates this critical phase in its economic reform process.
