The implications of Ethiopia’s abandonment of its long-standing fixed exchange rate policy in favor of a market-based foreign exchange rate system continue to reverberate. The decision has set off speculation among academics, analysts, the business community, the media, ordinary Ethiopians as well as foreigners about the motives behind it and its effect on the nation and its people. Although the National Bank of Ethiopia (NBE) had stated on its three years strategic plan (2023-2026) that it was intent on transforming Ethiopia’s foreign currency regime, letting the Ethiopian birr float came as a bombshell for Ethiopians far and wide. As the bank rolls out a series of complementary measures to ensure that one of the most consequential decisions in recent memory achieves its intended outcomes, Ethiopians are still struggling to make sense of the flood of information and opinions that has inevitably been swirling around.
Hours after NBE publicized the surprise move, the International Monetary Fund (IMF) approved a USD 3.4 billion dollar financial package for Ethiopia that had been in the works for years. The day after, the World Bank announced it gave the green light for a USD 1.5 billion in financing, in addition to an estimated USD 15 billion earmarked for backing economic reform and development projects in the country over the coming three years through its affiliates—the International Development Association (IDA), the International Finance Corporation (IFC) and the Multilateral International Guarantee Agency (MIGA). The Bretton Woods institutions have also indicated that Ethiopia could secure additional funding from development partners and a debt restructuring agreement with international creditors.
The radical shift in the exchange rate regime introduced by NBE has been billed by the government as the opening salvo of a comprehensive macroeconomic policy reform that it claims will positively transform the national economy. The case for a fundamental reorientation of the economy has rarely been stronger. Ethiopia has been mired in the throes of devastating economic pressures; chronic inflation, unsustainable debt levels, low international reserves, chronic unemployment, and mostly consequences of widespread conflicts in various regions of the country. While there are disagreements about the extent and timing of the reform needed to tackle these phenomena, their detrimental impact undoubtedly necessitates urgent action.
The measures NBE has taken to address Ethiopia’s macroeconomic woes are not limited to floating the birr. The central bank has discontinued the practice of compelling exporters to surrender half of the foreign exchange they earn to its coffers, deregulated how commercial banks allocate forex to importers, liberalized import and capital flow rules, and given the go-ahead for the establishment of non-bank currency exchanges. The government and its international partners have touted the initiatives as being essential to restoring macroeconomic stability; strengthening the financial sector; enabling the private sector to contribute more strongly to sustainable, broad-based, and inclusive growth; raising production and productivity; and bringing the nation’s protracted debt restructuring talks to a successful end. They also emphasize that due consideration has been given to mitigating the reforms’ painful socio-economic impacts on the poor through temporary subsidies on fuel, fertilizers, medicines and edible oil as well as widening the reach and impact of the social safety-net programs.
The measures are not without any consequences. The steep devaluation of the birr has led to a hike in the cost of essential goods which are mostly imported, exacerbating food insecurity and cost-of-living challenges for low-income households. A depreciating birr inevitably escalates government expenditure and the local currency cost of servicing the significant foreign debt the country owes, potentially compelling the government to resort to measures that stoke inflationary pressure, namely levying additional taxes or printing money. The majority poor will bear the brunt of the impacts of the floating, which may well fuel deeper discontent and political instability.
Although the macroeconomic reform policy may herald the dawn of a new era for Ethiopia’s economy, it is bound to fail in the absence of one fundamental precondition. Economic reforms are unlikely to succeed in a climate of political unrest. Numerous countries have attempted similar reforms with comparable support packages only to experience severe setbacks and worsening conditions. Ethiopia is no exception unless it addresses its political and security challenges urgently.
The success of the reform is intrinsically linked to the state of peace and security within the country. Creating an environment where investors feel secure, public confidence is high, and social grievances are addressed is vital for realizing the intended benefits of these economic reforms.
To achieve economic progress, it is essential to rebuild trust between the government and its citizens, restore law and order, and halt civilian casualties. Genuine dialogue among political forces is also paramount. Only by addressing these underlying issues can Ethiopia create a conducive environment for economic growth and national development.
