On July 29, 2024, Ethiopia's central bank implemented a significant economic reform by floating the country's currency, the birr. This decision resulted in a 30% depreciation of the birr against the US dollar, with the exchange rate shifting from 57.48 to 74.73 birr per dollar.
The currency flotation is a crucial step in Ethiopia's efforts to secure support from the International Monetary Fund (IMF) and make progress on its long-delayed debt restructuring. This move comes as the Horn of Africa nation grapples with soaring inflation and chronic foreign currency shortages.
Ethiopia, Africa's second-most populous country with over 80 different ethnic groups, has been implementing a series of economic reforms since 2018. The country has experienced rapid economic growth in recent years, averaging 9.8% annually from 2008/09 to 2018/19. However, it still faces significant economic challenges, including one of the lowest per capita incomes in the world.
The central bank's new policy allows banks to freely negotiate foreign currency rates with clients and among themselves, with the central bank making only limited interventions in the forex markets. This shift to a market-determined foreign exchange rate is expected to address macroeconomic distortions and improve the country's economic stability.
Mamo Mihretu, the central bank governor, announced that Ethiopia would receive $10.7 billion in external financing support from the IMF, the World Bank, and other creditors. This funding is described as exceptional and front-loaded, potentially being among the highest such allocations in the African continent.
"The IMF and World Bank are both providing exceptional and front-loaded funding support that will be among their highest such allocations in the African continent."
The currency flotation has been welcomed by importers who previously relied on the black market for foreign currency. One businessman in Addis Ababa expressed relief, stating that they can now operate through legal channels for buying and selling dollars.
Ethiopia's economic reforms are part of a broader strategy to attract foreign investment and improve its business environment. The country, known for its coffee exports and ambitious infrastructure projects like the Grand Ethiopian Renaissance Dam, has been working on privatizing state-owned enterprises and diversifying its economy beyond agriculture, which currently accounts for about 35% of GDP.
The United States embassy in Addis Ababa welcomed the shift to a market-determined foreign exchange rate, acknowledging it as a difficult but necessary step for Ethiopia to address its economic challenges.
As Ethiopia continues its economic reform journey, the success of these measures will be crucial in securing international support and stabilizing its economy. The country's young population, with a median age of 19.5 years, represents both a challenge and an opportunity for future economic growth and development.