Ethiopia's Birr Devaluation Sparks Economic Concerns
Thursday 8 August 2024
Ethiopia's currency, the birr, has depreciated by 30% against the US dollar after the government eased currency controls, the Commercial Bank of Ethiopia reports. This significant policy shift aims to secure a $10.7 billion loan from the International Monetary Fund (IMF) and the World Bank by abandoning the fixed exchange rate system.
Many Ethiopians are worried that this move will lead to a steep increase in the cost of living, especially with inflation already high. The country has been grappling with severe foreign currency shortages, a problem worsened by the recent two-year civil war in the Tigray region and ongoing conflicts in other areas, which have deterred foreign investment.
The central bank has announced that the birr's value will now be determined by the market, reflecting the IMF's demands for economic reforms, including a floating currency, as part of the bailout conditions. The ongoing negotiations also focus on restructuring Ethiopia's external debt, which stands at around $28 billion.
Mamo Mehretu, the central bank governor, stated on Monday that Ethiopia is implementing a market-driven foreign exchange system, marking the most significant policy change in fifty years. This new system allows commercial banks to set foreign currency prices through negotiation.
Historically, devaluations of the birr have led to sharp price increases for food and other imported goods. To ease the transition and prevent economic instability, the government has pledged subsidies for essential goods like petrol and additional support for low-income workers.
One of the driving factors for this policy change is the thriving parallel market, where the dollar was traded at twice the official rate due to the chronic foreign currency shortage. Importers often turned to this unofficial market, which has already driven up some costs. There are concerns that the birr's value might fall even further, potentially surpassing the parallel market rates.
