Gov’t sets record straight on Forex liberalization, devaluation

Ministry of Finance strongly signals that there are no plans of forex exchange liberalization or devaluation at the moment.
“No considerations are being made to liberalize foreign exchange or devaluation at the moment,” underlined, Ahmed Shide, Minister of Finance, as the Nation engages with the International Monetary Fund (IMF) and World Bank to improve the exchange-rate system.
“Forex liberalization is important down the line,” said the Minister, mid this week speaking at Big 5 construct Ethiopia event adding, “There are diverse experiences around countries regarding forex exchange rate arrangement. There is no plan to immediately go to forex liberalization as we need to take diverse global experiences to tailor it to our own national context both politically and economically.”
It is well know by now that the foreign-currency shortages have plagued the country and led the authorities to restrict allocations to private industry. Foreign currency deficit has led to a thriving black market exchange, fuelling already-problematic illicit financial flows in the country. The black market limits the inflow and facilitates the outflow of legitimate foreign currency.
The IMF specialists, who paid visit to Ethiopia on April 7, 2023, avowed that they had decided to support Ethiopia’s second Homegrown Economic Reform (HGER 2.0) which stated that the exchange market would be gradually liberalized in the coming three years. Also there are rumors that the government is in a bid to fundamentally reform the exchange regime that leads to the unification of the official and parallel markets soon.
The country has an official exchange that’s currently at about 54 per dollar with little changes since the start of the year; contrast to the parallel rate that’s almost double.
“We need to reform the Forex exchange arrangement regime as part of the home grown economic plan (HGER),” sensitized the Minister.
Efforts are also ongoing from the government’s side to restore expected support to the economy and HGER II reform program which is expected to be introduced in the coming couple of months.
Last month, Ethiopian macroeconomic policy makers were engaged in a series of discussions with the IMF and World Bank.
“The Central Bank is working on reforming strategies as part of the HGER agenda and we’re also in discussion with international partners like IMF and World Bank and we will continue with our discussion, but there is no immediate consideration either to liberalize forex market or devaluation,” maintained the Minister with regards to strategies being deployed.
“To reflect critically down the line, the whole package of economic reform is more important and it is not only about forex but also the whole micro economy issues that need to be addressed and synchronized in a way that it will contribute significantly to coordinate to the balance including that of forex,” Ahmed elaborated.
“As part of sustaining the economy, the government is also opening the closed market,” said the minister indicating that the banking sector will be open within couple of months.
Ethiopia’s foreign currency shortage is exacerbated by ongoing instability. Massive government spending on the war resulted in a foreign exchange reserve outflow of US$307 million during the 2020/21 fiscal year. The conflict obstructed foreign currency inflow by limiting tourism and foreign direct investment. It also affected Ethiopia’s access to hard currencies by triggering economic sanctions and the suspension of aid and international loans.
As experts reflect, the Ethiopian government is expected to come up with further commitments particularly in political issues so as to get support from the international organizations, which are dominated by western allies.
As reserves dwindled over the course of 2022, the government has been applying administrative measures to control foreign exchange flows by foreign exchange rationing, which has became even more acute in 2022.
On its latest sub-Saharan Africa Regional economic outlook, IMF emphasized depreciation of sub-Saharan African currencies including Ethiopia against the US dollar, pushing up public debt stock, and aggravating inflation. IMF said weaker currencies make the fight to curb inflation harder given sub-Saharan Africa’s dependence on imports. According to the report countries in the region have recorded an average of 8 percent depreciation of their currencies in 2022 exacerbating the financing crisis by increasing the external debt service burden.
On the implications, the IMF said when currencies weaken against the US dollar, local prices rise, as much of what people buy, including essential items like food, and imports.
The financial institution said more than two-thirds of imports are priced in US dollars for most countries in the region.
Policymakers can take several steps to mitigate possible adverse impacts on the economy as a result of the necessary currency adjustments. In countries where inflation is aggravated by the exchange rate pass through, tighter monetary policy are said to help alleviate the pressure by keeping inflation expectations in check and stem capital outflows while attracting inflows. Where fiscal imbalances are key drivers of exchange rate pressures, fiscal consolidation are said to help to rein in external imbalances and contain the increase in debt related to currency depreciation.