Ethiopia recently made a significant shift in its monetary policy by floating its currency, the birr. This move has led to a sharp devaluation, with the exchange rate plummeting from 57 birr per US dollar a week ago to the current rates as indicated by the Commercial Bank of Ethiopia (CBE). This represents an astonishing devaluation of approximately 82%.
Current Exchange Rates
As of today, the CBE has published the following exchange rates for the Ethiopian birr (ETB):
- US Dollar (USD): Buying – 103.9413, Selling – 105.6201
- Pound Sterling (GBP): Buying – 121.9101, Selling – 123.9483
- Euro (EUR): Buying – 110.5307, Selling – 112.3413
- Swiss Franc (CHF): Buying – 111.5904, Selling – 113.4222
- Kuwaiti Dinar (KWD): Buying – 281.7255, Selling – 286.9600
- Chinese Yuan (CNY): Buying – 10.3712, Selling – 10.5786
- UAE Dirham (AED): Buying – 20.4557, Selling – 20.8648
The Float Decision
The decision to float the birr was driven by the government’s intention to stabilize the economy and address imbalances in the foreign exchange market. By allowing market forces to determine the exchange rate, the National Bank of Ethiopia (NBE) aimed to improve foreign currency reserves, attract foreign investment, and enhance export competitiveness.
Deal with IMF and World Bank
A crucial factor leading to this bold monetary policy shift was Ethiopia securing a deal with the International Monetary Fund (IMF) and the World Bank. The agreement provided Ethiopia with access to $16 billion USD for debt restructuring and economic support. This financial assistance was contingent upon Ethiopia implementing significant economic reforms, including floating its currency. The support from these international financial institutions is expected to help stabilize the economy, manage debt, and spur growth.
Immediate Impact
The immediate impact of the float has been a dramatic devaluation of the birr. The currency’s value against the US dollar has almost doubled, signaling significant inflationary pressure. This sharp adjustment is expected to affect various sectors of the economy:
- Import Costs: With the birr losing value, the cost of imported goods is set to rise, leading to increased prices for essential items and raw materials. This could exacerbate inflation, affecting the purchasing power of Ethiopian consumers.
- Export Competitiveness: On the positive side, a weaker birr makes Ethiopian exports cheaper and more competitive on the international market. This could potentially boost the country’s export revenues and help reduce the trade deficit.
- Foreign Debt: Ethiopia’s foreign debt, primarily denominated in foreign currencies, will become more expensive to service. This could strain the country’s financial resources and necessitate careful debt management strategies.
Prime Minister Abiy Ahmed’s Appeal
Prime Minister Abiy Ahmed has urged banks to narrow the gap between official exchange rates and the black market. By aligning the official rates closer to the black market rates, the government aims to curb illegal currency trading and stabilize the official exchange market. This move is crucial in restoring confidence in the formal banking system and ensuring a more transparent and regulated financial environment.
Long-term Considerations
While the immediate effects of the currency float are challenging, the long-term benefits could be substantial if managed properly. A market-determined exchange rate can lead to a more efficient allocation of resources, improved investment climate, and a more balanced economy.
Government Measures
To mitigate the adverse effects of the devaluation, the Ethiopian government is expected to implement several measures:
- Monetary Policy Adjustments: Tightening monetary policy to control inflation and stabilize the currency.
- Fiscal Policies: Implementing fiscal measures to support vulnerable sectors and individuals affected by rising costs.
- Foreign Exchange Management: Enhancing foreign exchange reserves and managing capital flows to ensure stability.
