Ethiopia's Currency Plummets Following Policy Shift Amid IMF Negotiations

Ethiopia's currency, the birr, has experienced a significant 30% devaluation against the US dollar, following the government's decision to relax long-standing currency restrictions. This move aims to secure a $10.7 billion loan from the International Monetary Fund (IMF) and World Bank. The reversal of the fixed exchange rate policy has raised concerns among citizens, who fear a surge in living costs amidst already high inflation rates. The Ethiopian economy has been grappling with chronic foreign currency shortages, exacerbated by a brutal two-year civil conflict in the northern Tigray region, which concluded in 2022, and ongoing unrest in other areas. These challenges have hindered the country’s ability to attract essential foreign investment. The central bank's new policy will allow the birr's value to be determined by market forces, marking a significant shift in economic strategy. As negotiations with the IMF approach completion, analysts note that the organization has insisted on various reforms, including the currency float, as a condition for financial assistance. The discussions also encompass restructuring Ethiopia's external debt, which stands at approximately $28 billion. Central bank head Mamo Mehretu announced the introduction of a competitive, market-based foreign exchange regime, the first of its kind in fifty years. To mitigate potential inflation and market instability, the Ethiopian government has committed to providing subsidies on essential goods, such as petrol, and additional support for low-income workers. The central bank cited the existence of a thriving parallel market, where the dollar was previously priced at double the official rate, as a key reason for the policy change.