The Ethiopian central bank has removed all restrictions on trading the Ethiopian birr (ETB), in a move that analysts fear could stoke significantly higher inflation in the East African country.
In a statement earlier this week, the National Bank of Ethiopia (NBE) said that it was “announcing a major revision of the country’s foreign exchange regime effective immediately.”
“The reform introduces a competitive, market-based determination of the exchange rate and addresses a long-standing distortion within the Ethiopian economy,” the statement said. “Ethiopia’s foreign exchange reform is just one part of a wider package of economic reforms that are being implemented and accelerated over the coming months.”
The central bank confirmed that “banks are henceforth allowed to buy and sell foreign currencies from/to their clients and among themselves at freely negotiated rates” and that NBE would make only “limited interventions to support the market in its early days and if justified by disorderly market conditions.”
The move comes after months of negotiations with the IMF and World Bank. Since defaulting on a $33 million Eurobond repayment last year, Addis Ababa has turned to these multinational development finance institutions in a bid to secure external funding and improve its macroeconomic standing. However, the IMF has insisted on foreign exchange liberalisation as a condition for Ethiopia receiving around $10.7 billion in external financing.
Now that Ethiopia has committed to liberalising its forex regime, it will receive this substantial package of international financing, which will dramatically enhance the country’s macroeconomic stability and ensure that it can meet its international obligations. But what will this mean for the value of the birr and for standards of living in Ethiopia?
In the first trading session after the central bank announced the forex regime, the birr slumped by 30% against the dollar. The birr was trading at 57.48 against the dollar on Friday but immediately depreciated to trade at 74.73 on Monday. It remains to be seen how much further the birr will trade but it seems likely that further depreciations are ahead. This is often the case when a currency is freely floated for the first time – when Egypt liberalised the Egyptian pound in March, for example, the currency plunged to record lows.
While many economists have noted that liberalised financial markets are crucial for promoting long-term growth and investment, some analysts fear that the move to open up birr markets in return for IMF financial assistance could worsen Ethiopians’ standard of living. Indeed, a currency devaluation could make it more expensive for Ethiopians to purchase imported goods as they will be more expensive in local terms.
Some have suggested that inflation may not pick up as much as feared. After all, because of the shortage of US dollars in the country, many importers have already had to turn to the black market, where the rates are more reflective of the birr’s real market value. This means that higher costs may already have been priced in – although only time will tell.
That said, Getachew Temare, a human rights activist, is concerned that “the abrupt announcement of Ethiopia’s liberalisation of its foreign exchange market, accompanied by congratulations from the prime minister to the people of the country, will undoubtedly wreak severe socioeconomic and political havoc on millions of Ethiopians.”
He argued that “this decision starkly underscores the nation’s recent failures” as “the currency adjustment will fundamentally trigger intense inflationary pain.”
“The government lacks credible measures to stabilise the situation, as it has failed to engage meaningfully with the country’s deep-seated issues. The economy cannot heal amidst ongoing conflict and instability, with the wounds of the Tigray war still fresh,” he added. “Immediately after the news broke yesterday, a sharp rise in the prices of goods and commodities was observed. For example, the price of imported milk powder surged by 400 ETB, and other products have also seen significant price hikes.”
Temare questions whether now is the right time for a liberalisation and whether the government has been blinded of the long-term effects by the short-term need for IMF cash. “This decision is monumental and was made without seriously considering numerous critical factors. The nation’s current situation does not warrant a full-fledged liberalisation of the market, especially floating the foreign exchange market,” he told Disruption Banking. “This is not an argument against liberalising the forex market in principle; the core issue is whether now is the right time to implement such a drastic policy shift.”
“The government may claim electoral legitimacy, but it faces a profound crisis of legitimacy,” Temare said. “For instance, Tigray remains unrepresented in the federation, yet this decision will impact the region’s rehabilitation efforts. The government appears more interested in the billions of dollars in aid this decision might attract than in understanding the real pain it will inflict on its citizens.”
Author: Harry Clynch
#Ethiopia #Africa #ForeignExchange #EthiopianBirr #ETB
