Ethiopia’s central bank has floated the birr currency, a move aimed at securing support from the International Monetary Fund (IMF) and advancing long-delayed debt restructuring. The birr’s value against the U.S. dollar fell by 30% to 74.73 per dollar, according to the country’s biggest lender, the Commercial Bank of Ethiopia. This marks a significant drop from the 57.48 birr per dollar exchange rate recorded on Friday.
The Horn of Africa nation has been grappling with soaring inflation and chronic foreign currency shortages. Last December, Ethiopia became the third African economy in recent years to default on its government debt. Since then, the country has been in talks with the IMF to establish a new lending program after the previous one, agreed upon in 2019, was abandoned due to conflict in the northern region of Tigray. Negotiations resumed after a peace deal was reached in November 2022.
The central bank announced that banks are now permitted to buy and sell foreign currencies from and to their clients and among themselves at freely negotiated rates. The bank also stated that it would only make limited interventions in the foreign exchange markets going forward. These reforms were initially announced by Prime Minister Abiy Ahmed late on Sunday.
Central bank governor Mamo Mihretu said in an online video that, as part of the reforms, Ethiopia would receive $10.7 billion in external financing from the IMF, the World Bank, and other creditors. “The IMF and World Bank are both providing exceptional and front-loaded funding support that will be among their highest such allocations in the African continent,” Mihretu said.
Importers who had been relying on the black market to secure dollars expressed relief at the central bank’s decision. “Now I don’t need to go to the black market to buy or sell dollars. It is now a market-based foreign exchange regime, so we will buy or sell based on the legal channels,” said a businessman in the capital, Addis Ababa, who preferred to remain anonymous.
The IMF did not immediately respond to a request for comment. However, Bloomberg reported that the fund’s executive board was scheduled to meet on Monday to discuss a new program for Ethiopia. Reuters could not confirm the meeting.
Following the central bank’s announcement, Ethiopia’s main $1 billion government bond edged higher, reaching 75.42 cents on the dollar by 1400 GMT, its highest level since early 2022. The United States welcomed the shift, with the U.S. embassy in Addis Ababa posting on social media platform X that “Market-based FX is a difficult but necessary step for Ethiopia to address macroeconomic distortions.”
Ethiopia, Africa’s second-most populous country, requested a debt restructuring under the Group of 20’s Common Framework process in early 2021. However, progress was slowed by the war in Tigray. The government has previously announced other reforms linked to the IMF talks, including adopting an interest rate-based monetary policy earlier this month.
Economic analysts have mixed opinions on the longer-term impact of the devaluation. Abdulmenan Mohammed, an Ethiopian economic analyst based in Britain, told Reuters that the consequences of the exchange rate regime change will take time to be reflected in the economy. He noted that the devaluation could result in an increased cost of living, which will mainly affect the urban poor, the jobless, pensioners, and low-paid employees.
