Ethiopia's Currency Plummets 30% After Policy Change

Photo credit: BBC

The Ethiopian currency, the birr, has experienced a sharp 30% decline against the US dollar following the government's decision to relax currency restrictions. This significant policy change aims to secure a $10.7 billion loan from the International Monetary Fund (IMF) and World Bank.

The government's move to float the currency, allowing its value to be set by the market, marks a major shift in policy after half a century. The Commercial Bank of Ethiopia, one of the country's largest banks, reported the decline in the birr's value.

The decision has sparked apprehension among Ethiopians, who fear a surge in living costs amidst already high inflation. The country has struggled with chronic foreign currency shortages, exacerbated by a two-year civil war in the northern Tigray region and ongoing conflicts in other areas, making it challenging to attract foreign investment.

The new policy, announced by the central bank, allows commercial banks to buy and sell foreign currencies at negotiated prices. To mitigate the impact of the transition, the government has pledged to provide subsidies on essential goods like petrol and offer extra support for low-income workers.

However, concerns persist that the birr's value may continue to decline, potentially falling below the rate it was fetching on the parallel market. The flourishing parallel market, where the dollar was costing double the official rate, was cited as one reason for the policy change. Importers often turned to this market due to foreign currency shortages, meaning some higher costs have already been factored in.

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