(Addis Ababa) The Central Bank of Ethiopia (NBE) announced on Monday a major reform of the country’s tightly controlled exchange rate regime, obtaining the validation by the IMF of a $3.4 billion aid program in its favor.
Ethiopia now allows commercial banks to freely set the exchange rate of the national currency, the birr, and lifts some restrictions on access to foreign currency.
A major reform that took place while awaiting approval of a support program that had been fiercely negotiated for months with the International Monetary Fund (IMF) and was cruelly necessary against a backdrop of chronic foreign currency shortages.
The Fund, welcoming “essential steps forward”, finally validated this envelope which will be spread over four years and results in the immediate payment of a first tranche of one billion dollars.
The Washington-based institution had been demanding from Addis Ababa numerous reforms to its still largely controlled economy. The buoyancy of the birr, which Ethiopian authorities were reluctant to accept, was one of the sticking points in the negotiations, according to analysts.
Until now, the NBE set the exchange rate for the birr every day, which remains non-convertible and non-exportable despite the reform. The value of the birr on the black market, which is very dynamic in Ethiopia due to tightly controlled access to foreign currency, was, before the reform, more than 50% lower than the central bank rate.
On Monday, the Commercial Bank of Ethiopia (CBE), Ethiopia’s main commercial bank, which is wholly owned by the state, lowered the value of the birr by 30% against major currencies.
It now buys a dollar for 74.73 birr, still far from the parallel market rate, stable on Monday, where a dollar is trading at 113 birr, according to an informal broker.
“Crucially necessary”
In a statement released Monday, the NBE announced “the transition to a market-based exchange rate regime, in which banks are now allowed to sell and buy foreign currencies to their customers and among themselves at freely negotiated rates.”
The NBE announces “the liberalization of the foreign exchange market for imports”, including the lifting of rules limiting the issuance of foreign currency by banks and authorizes the establishment of “non-bank exchange offices”.
The reform also lifts the obligation for banks and exporters to pay their foreign currency to the central bank and increases from 40% to 50% the share of their export earnings that operators can keep in foreign currency.
But the NBE does not announce any easing of restrictions on access to foreign currency for individuals and recalls that the strict control of capital outflows abroad has not been removed.
Bridging the gap between the legal rate and the “informal” rate aims to redirect foreign currency towards the banking system, while removing restrictions on access to it, in order to make the parallel market unattractive, explains an analyst who requested anonymity.
But “Ethiopia is seriously short of foreign currency” due to “low exports and limited access to international credit,” Ethiopian economist Gutu Tesso told AFP, doubting that the reform “will make foreign currency more available” in the short term and fearing that it will fuel inflation.
Slow growth
This reform “is demanding” but “crucially necessary”, assures the NBE, estimating that the “very restrictive exchange rate regime” has “undermined Ethiopia’s strong attractiveness” to foreign investors, “provoked the emergence of a parallel exchange market” and “high inflation” as well as the development of “contraband exports”.
“A market-based exchange rate regime is essential to address foreign exchange shortages, remove constraints on private sector investment and growth, and align the prices of imported and exported goods and services with market realities,” Prime Minister Abiy Ahmed said in a statement on his macroeconomic reform agenda on Sunday evening.
PHOTO TIKSA NEGERI, REUTERS ARCHIVES
Ethiopian Prime Minister Abiy Ahmed
These also include the modernisation, already underway, of the interbank market and a tax reform.
When he took over as president of Ethiopia in 2018, Mr Abiy Ahmed showed a desire for ambitious reforms, particularly the modernisation of a heavily state-controlled economy, which was very restricted and not very open to foreign investment.
The second most populous country in Africa, with some 120 million people, Ethiopia recorded high rates of economic growth – often exceeding 10% annually – between 2004 and 2019.
But its economy has been hit by the COVID-19 pandemic, the war in Ukraine and multiple internal conflicts – including the deadly and destructive war in the northern region of Tigray (2020-2022) – putting a halt to reforms.
Growth has slowed to an average of 5.9% between 2020 and 2023, while inflation has soared from 20.4% to 30.2% over the same period, according to the World Bank.