Ethiopia's Currency Drops 30% After IMF Policy Changes

ADDIS ABABA, Ethiopia (AP) — Ethiopia's currency, the birr, experienced a dramatic 30% devaluation on Tuesday, coinciding with the central bank's implementation of a flexible exchange rate policy. This shift, supported by the International Monetary Fund (IMF), marks a significant departure from decades of government-controlled pricing, which had fostered a thriving black market for foreign exchange. Under the new policy, commercial banks are now empowered to set foreign exchange rates, and non-bank entities can operate forex bureaux for the first time. The IMF has approved a substantial four-year credit facility of $3.4 billion to support Ethiopia's economic reforms, with an immediate disbursement of $1 billion to address urgent financial needs. IMF Managing Director Kristalina Georgieva hailed the reforms as a “landmark moment for Ethiopia.” The Ethiopian government anticipates securing approximately $13.5 billion in additional funding from various sources, including the World Bank and currency swap agreements with foreign nations. Prime Minister Abiy Ahmed emphasized that the new exchange rate regime is essential for alleviating foreign exchange shortages and fostering private sector investment. However, the immediate impact of the devaluation has led to significant price increases, with reports of goods rising by as much as 25% overnight. The government has pledged to subsidize fuel and increase civil servant salaries to mitigate the effects on vulnerable populations, although concerns remain about the potential for rising inflation. Economists warn that while the reforms are necessary to address the longstanding disparity between official and parallel market rates, they also carry risks. Samson Berhane, an economist in Addis Ababa, noted that the floating exchange rate was overdue, but cautioned that it could lead to increased inflation as the economy adjusts.