Ethiopiaโs currency plunged by 30% after the central bank sought an IMF bailout.
| Photo Credit: AFP
Cash-strapped ased foreign exchange curbs on Monday as part of a broad economic reform package as the International Monetary Fund approved a loan to the Horn of Africa nation seeking a multibillion-dollar bailout.
The value of the local currency, the birr, plunged by around 30% after the move by the countryโs central bank.
โThe reform introduces a competitive market-based determination of the exchange rate and addresses a long-standing distortion within the Ethiopian economy,โ the National Bank of Ethiopia (NBE) said in a statement.
Africaโs second most populous country is pinning its hopes on a rescue package of at least $10.5 billion from external lenders including the IMF, but negotiations have been long and fraught.
The International Monetary Fundโs board on Monday approved a four-year loan programme worth around $3.4 billion to support the reforms, with around $1 billion immediately disbursed.
โThis a landmark moment for Ethiopiaโ and the loan is a testament to the countryโs โstrong commitment to transformative reformsโ, IMF Managing Director Kristalina Georgieva said in a statement.
Analysts had said the IMF was demanding several reforms of Ethiopiaโs state-controlled economy, including floating the currency, in order to unlock the funding.
Battered in recent years by several armed conflicts, the Covid-19 pandemic and climate shocks, the African country has about $28 billion of external debt and is grappling with sky-high inflation at around 20% and a shortage of foreign currency reserves.
Under the shift to a market-based exchange rate regime, the National Bank of Ethiopia (NBE) said โbanks are henceforth allowed to buy and sell foreign currencies from/to their clients and among themselves at freely negotiated ratesโ.
The central bank would, it said, make โonly limited interventions to support the market in its early days and if justified by disorderly market conditionsโ.
More integration
After the announcement, the leading Commercial Bank of Ethiopia, which is wholly owned by the state, said the US dollar was buying 74.73 birr, compared to 57.48 on Friday.
Ethiopia has a highly active black market for currency trading, with the value of the birr at about half of the previous official rate, which used to be set daily by the NBE.
The central bank also foreshadowed the opening of Ethiopiaโs securities market to foreign investors, saying details would be disclosed in the near future.
Among other measures, it said it would allow foreign exchange to be retained by exporters and commercial banks to boost supplies to the private sector, and announced the introduction of non-bank foreign exchange bureaus.
The government has also decided to temporarily subsidise some essential imports such as fuel, fertilisers, medicines and edible oils, as well as provide financial support for low-income families and bolster public-service salaries, it said.
โThe FX reforms… represent a comprehensive set of measures that will support Ethiopiaโs current stage of development and its increasing integration with the rest of the world.โ
Senior Ethiopian economist Gutu Tesso warned the forex reforms could โexacerbate the economic crisisโ by driving up inflation and would not in themselves attract foreign investment which required โensuring reliable peace and securityโ.
But business analyst Samson Berhane was more optimistic, saying that the โfinancial cushionโ from international lenders would help stabilise the countryโs currency and that the gap between the official and black market rates could narrow, while the move could also help exports including mining.
