The Ethiopian government has transitioned to a market-based foreign exchange rate system, allowing the birr’s value to be determined by the market. This shift marks the most significant economic change in the country in 50 years, moving away from the long-standing fixed exchange rate policy.
The National Bank said in a statement that “banks are henceforth allowed to buy and sell foreign currencies from/to their clients and among themselves at freely negotiated rates” and that it would only make “limited interventions” to support the markets in its early days and if justified by disorderly market conditions.”
The decision weakens the birr’s purchasing power in the international market. Previous similar devaluations led to sharp increases in the cost of food and other imported goods.
The National Bank of Ethiopia aims for the market-determined exchange rate system to attract foreign investment, stabilize the economy, secure IMF funding, and advance a long-delayed debt overhaul.
Ethiopia is struggling with a battered economy, facing soaring inflation, a high debt burden, unemployment, post-COVID stagnation, and ongoing conflicts in various regions.
To ease the transition and curb inflation, Ethiopia’s government will subsidize essential goods like petrol and offer extra support for low-income workers. The reforms also include ending mandatory foreign exchange surrender for exporters, liberalizing import and capital flow rules, allowing non-bank currency exchanges, and deregulating how commercial banks allocate forex to importers.
The National Bank cited the rise of an “unanchored” parallel market, where the dollar was trading at double the official rate, as a key reason for the new policy.
The country struggled to provide hard currency at the official rate to designated sectors and importers, leading to long wait times and forcing them to turn to the parallel market.
Kebour Ghenna, Executive Director of the Pan African Chamber of Commerce and Industry (PACCI), stated that when the market sets the exchange rate, it exposes the economy to speculative volatility, causing foreign exchange rates to fluctuate significantly in a short period. “A market-based currency exchange system would weaken the birr’s purchasing power and raise the value of the dollar, negatively impacting businesses. As many goods are imported with foreign currency, their prices are likely to increase due to higher import costs, potentially straining the quality of life further,” he told BBC Amharic.
Following the government’s relaxation of currency restrictions, the Ethiopian currency has fallen by 30% against the US dollar. The US dollar was buying 74.73 birr and selling at 76.23, the leading Commercial Bank of Ethiopia said in a statement published on X. On Friday the buying rate was 57.48 and selling 58.64. Consequently, prices in the Addis Ababa market have risen by up to 400 birr, primarily affecting the cost of imported food, beverages, and other goods. Specifically, prices for imported edible oil products have increased by 30 to 400 birr today.
