PREVIEW
Ethiopia’s move to a market-based foreign exchange regime, a requirement of the new financing programme, saw the birr drop 30% against the dollar
Prime Minister Abiy Ahmed’s government has reached an agreement with the IMF on a four-year US$3.4 billion loan – part of a $10.7bn financing programme from the Fund and the World Bank – after accepting a major drop in its currency’s value (AC Vol 65 No 6, Addis enters the debt talks tunnel).
The birr’s value fell by 30% against the US dollar on 29 July in the first day of trading after the government relaxed currency restrictions.
The move to a market-based foreign exchange regime will allow commercial banks to buy and sell foreign currencies at negotiated prices, and allow foreign currency to be retained by exporters and commercial banks. Ethiopians will also be able to open foreign currency accounts.
In a statement, the Treasury in Addis Ababa said that the outgoing system had ‘resulted in the emergence of an unanchored parallel market exchange rate together with high inflation’.
The IMF loan, which allows for the immediate disbursement of $1bn, is part of an economic reform programme Ethiopia needs to undertake in order to start long-delayed restructuring talks on the country’s $28bn external debt burden. The government is hoping to ‘substantially reduce its near-term external debt service obligations and instead increase its developmental expenditures’.
To mitigate the effects of currency devaluation on rising prices, the Treasury has decided to temporarily subsidise a group of essential imports including fuel, fertilisers, medicine and edible oil; to supplement civil servants’ wages; and to increase the scope of its income support programme for the poor to cover more than 10 million families.
Ethiopians have been suffering the effects of 30% inflation for over a year. (AC Vol 64 No 16, Abiy ploughs on as economy staggers).
Talks on a debt restructuring for Ethiopia, which defaulted on its only international government bond in late December, were delayed by the two-year civil war in Tigray (Dispatches 2/1/24, Abiy races for funds after debt default).
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