Ethiopia saw a significant drop in its currency’s value by 30% on Tuesday, following the implementation of a new flexible exchange rate policy supported by the International Monetary Fund. Mamo Mihretu, the governor of the National Bank of Ethiopia, announced these reforms aiming to introduce a competitive market-based exchange rate system and address economic distortions within the country.
Under these reforms, commercial banks are now permitted to determine foreign exchange rates, and non-bank entities can operate forex bureaux for the first time, marking a significant shift from the government-controlled pricing system that was in place for decades. The IMF approved a $3.4 billion credit facility over four years to support these reforms, with $1 billion set to be disbursed immediately to address urgent needs.
Prime Minister Abiy Ahmed emphasized the importance of the new exchange rate regime in alleviating forex shortages, promoting private sector investment, and aligning import and export prices with market realities to foster economic growth. Despite these positive changes, the immediate impact of the currency float was a sharp increase in inflation, causing concerns among some businesses and consumers in Addis Ababa.
To mitigate the effects of the reforms, the government promised to subsidize fuel prices and increase civil servant salaries. Many stall owners in Addis Ababa’s Merkato market opted to hold onto their goods in anticipation of future price stability. However, economic analysts warn that the reforms might lead to negative repercussions on the cost of living, particularly affecting vulnerable groups such as low-income earners and pensioners.
Real estate companies in Addis Ababa were among the first to adjust their prices following the currency devaluation. Ethiopia has long struggled with a shortage of foreign currency, resulting in a significant gap between official and parallel market exchange rates. Economists believe that while the exchange rate float was necessary, it comes with the risk of increased inflation in the near future as local banks adjust to market equilibrium.
