Ethiopia’s currency dives by 30% as IMF-backed reforms to stabilize the economy take effect

ADDIS ABABA, Ethiopia (AP) - Ethiopia’s currency lost 30% of its value Tuesday, the day after the central bank began implementing a flexible exchange rate policy backed by the International Monetary Fund as part of new measures to stabilize the eastern African nation’s economy.

Mamo Mihretu, governor of the National Bank of Ethiopia, said in a televised address Monday that the reforms "will introduce a competitive, market-based determination of the exchange rate and address a long-standing distortion within the Ethiopian economy."

Commercial banks can set the price of foreign exchange and non-bank entities are permitted to operate forex bureaux for the first time, a historic change in a country where the government for decades fixed those prices, allowing a black market to flourish.

The International Monetary Fund approved a four-year credit facility worth $3.4 billion to coincide with Ethiopia’s reforms. It pledged to disburse $1 billion immediately to address pressing needs, with Managing Director Kristalina Georgieva describing the reforms as a “landmark moment for Ethiopia.”

Ethiopia expects a total of around $13.5 billion in new funding, including from the World Bank and currency swap agreements with foreign governments.

Prime Minister Abiy Ahmed said in a statement that the new exchange rate regime is “critical to relieving (forex) shortages, removing constraints to private sector investment and growth, and aligning the prices of imported and exported goods and services with market realities.”

The Ethiopian currency, known as the birr, was one of the weakest in the region in recent months. Still, one of the immediate consequences of the exchange rate policy change was a sharp rise in inflation, and some businesspeople in Addis Ababa, the capital, were complaining Tuesday. Following the currency float, the birr depreciated by 30% in the official market against major foreign currencies.

"I wanted to purchase concert speakers last week and I was quoted about 100,000 birr ($1400), and today the same product is being sold 25% more,” said Yonas Anberber, a wedding planner.

The government has promised to subsidize fuel and raise the salaries of civil servants to help people adjust to the reforms.

In Merkato, Addis Ababa's biggest open-air market, many stall owners decided to hoard the bulk of their goods, hoping for price stability in the near future.

“The market for goods and services will react in the coming days, which may significantly have negative repercussions on the cost of living for many households,” Abdulemnan M. Hamza, an economic analyst in Addis Ababa, told the AP. “As a result, the urban poor, the lowly paid employees, the pensioners will suffer the most.”

Most of Addis Ababa's real-estate companies, which import many raw materials and make transactions based on an exchange rate fixed by authorities, were among the first to adjust their prices, increasing them by roughly 30%.

Ethiopia has long faced a critical shortage of foreign currency. For over a year, the gap between the official exchange rate and the parallel market rate soared, a disparity the government expects to narrow after the reforms.

"The floating was overdue as the parallel black market had reached its ceiling due to cash shortages in the economy," said Samson Berhane, an economist based in Addis Ababa. “Local banks have some room to maneuver the rate until it reaches equilibrium, but the disadvantage is that it comes with the risk of inflation that is likely to increase.”