For decades Ethiopia faced economic challenges manifested by a shortage of hard currency, unemployment, unsustainable debt service, illegal trade, a widening gap between the formal and parallel market in the Dollar-Birr exchange rate, unemployment, inflation and other economic woes.
For a long, the successive governments took various measures to redress the economic woes witnessed at the macroeconomic level, including depreciating the purchasing value of the birr, enhancing the amount of foreign currency deposited in the National Bank, and securing loans from multilateral financial institutions through negotiation, but attaining the intended solution was in vein. The shortage of hard currency in banks critically affected trade, business, and productive sectors. The galloping inflation also brought insurmountable crises to the ordinary citizens.
To bring a lasting solution for the macroeconomic imbalance almost a year ago, the government decided the exchange rate, the Birr against the Dollar and other foreign currencies, to be governed by demand and supply.
Consequently, the value of the Birr depreciated by 50 per cent and in order to curb the aspiring of customers towards the parallel market and to decide commodity exchange based on real commodity price, private foreign bureaus to be operational and others can be cited. In return, the IMF pledged to offer three billion Dollars in the form of a loan to the government and systematically released the loan phase bay phase.
The foreign exchange liberalization has also been accompanied by other complementary reforms. These include the end of foreign exchange surrender requirements to the NBE; removal of import restrictions, improvement of retention rules; removal of rules governing foreign exchange rationing; introduction of non-bank foreign exchange bureaus; removal of restrictions on Franco- valuate imports; and allowing residents to open account on hard currency.
Some argue that the government measures were dictated by the International Financial Institutions such as the International Monetary Fund /IMF/ and the World Bank and the flouting of the exchange rate critically hit the ordinary citizen’s day-to-day living due to inflation. The prices of imported commodities also are being skyrocketed.
Recently Finance Minister Ahmed Shide expressed that Ethiopia’s inclusive macroeconomic reforms are delivering remarkable outcomes.
During a briefing on the country’s current economic performance, the minister stated that the comprehensive macroeconomic reform program, implemented with thorough preparation since the beginning of the current Ethiopian fiscal year in July 2016 EC, has led to significant progress.
The Minister also emphasized that key policy shifts, including the adoption of a market-based foreign exchange system, the implementation of new fiscal and monetary policies, and legal reforms promoting investment, have collectively contributed to the positive results.
Foreign exchange transactions have remained stable, and this fiscal year has seen a notable increase in foreign currency earnings, he said, attributing the country’s strong export growth to the ongoing macroeconomic reforms.
The Minister also projected that Ethiopia’s economy is expected to grow by 8.4 per cent this fiscal year, crediting the reforms as a key driver of this anticipated growth.
To protect the public from unnecessary price hick, the government continues to subsidize essential goods, including fuel, fertilizer, oil, sugar, and medicines, as part of its efforts to support the population.
Getachew Alemu is a public policy specialist. While he recently made an interview with local media he said that it is too early to judge the policy shift. This is a very radical move compared to the way things have been done in Ethiopia for the last fifty, or sixty years.
The market is used to some level of regulation. In the past, the exchange rate has been always regulated by the central bank, which has always imposed its prerogatives through different legislative instruments. The sector has been exposed to a managed exchange rate regime.
Not only has the exchange rate been determined by the central bank, but the system has created its ecosystem around itself. Forex was being allocated through a rationing that created its bureaucracy in the financial system. This created its winners and losers. It also created illicit, under-the-table processes that some in the banking system used to extract benefits from.
Later, credit queues were also being sold at a profit. The retention rate policy also gave rise to a whole other process. It created a segment of social class: exporters, bankers, and others who have access to forex, and those who do not. Importing also has its own layers in this process.
The national bank has the mandate of crafting fiscal and monetary policy and implementing it.
Adjusting to the new norm is not going to be easy for the financial sector. Customers are not going to see the actual market response in a short month’ time; it’ll take longer before all those actors in the forex system realize what works in or against their interests and begin to react. Whether they are importers or exporters, or whether they are on the winning or losing side of the previous game, they have to adapt to the new norm.
The current exchange rate witnessed day to day in the formal system (around 130 birr to a dollar) is not going to be the actual market clearing rate. The actual market clearing rate will be identified once all these economic players realize their losses and gains, and start to price in their actual risks.
The change in the exchange rate is very likely going to be the outcome of an interaction between what was expressed in the formal banking system and the central bank. It is also determined by how the international financial institutions define the demand for foreign currency usage in Ethiopia, and how they respond to that demand.
There is some level of perceived policy implication in the current exchange rate. Because customers don’t have the mechanisms, the channels through which demand and supply can express themselves. The financial system is not capable of such mechanisms; it’s not designed in a way that enables those variables to express themselves.
For instance, if one needs foreign currency/forex/ for travel or any personal purpose, there was no way your interest could have been expressed in the market until now. Once the non-bank foreign company companies begin operating, financial institutions launch forex bureaus, and the infrastructure enabling the buying and selling of forex for regular people is in place, then the individualized currency interests will start to express themselves in the market.
Currently, the nation is simply transitioning from a very controlled and managed foreign exchange rate to one determined by the market. At this transitional juncture, the infrastructure and ecosystem are not yet there. Customers don’t have the channels to see this demand and supply express itself in the market. Therefore, it can be said that 131 is not the real price for Birr.
Tewodros Mekonen (PhD) is a senior country economist at the International Growth Center (IGC). As to him, the economic problems Ethiopia has been going through call for serious decisions and policy shifts. None of the potential ways out are pain-free. All the possible solutions to these problems are painful. But I hope the government has chosen the less painful way out. Floating is the better way out.
Prior, the Birr was devalued multiple times. Its value has dropped a lot. The government printed a lot of money during the Northern War. When a currency is printed and injected into the economy, its value drops. The exact value of a dollar at that time was not 57 birr. The Birr’s value has dropped a lot because the National Bank printed a lot of it. That was a mistake and dangerous.
Every mistake has its consequences. What we can do now is to choose the solution with the least domino effect. The good thing is that the government has admitted the mistake, accepted the problem, and introduced a measure that has the least pain and consequences.
In the days following the floating, some businesses have been hiding their products; hoarding. This is because they assume the official exchange rate will rise soon. They are speculating to sell later at higher prices. The floating will result in price hikes in the markets. This is the pain, for the time being. The government has to regulate trade practices and introduce subsidy packages to absorb the price hikes.
BY ABEBE WOLDEGIORGIS
THE ETHIOPIAN HERALD FRIDAY 4 JULY 2025
