Context: Ethiopia has recently eased foreign exchange curbs as part of a broad economic reform package.

• This move coincides with the International Monetary Fund’s (IMF) approval of a loan to Ethiopia, which is seeking a multibillion-dollar bailout.

Key Developments

• Currency Devaluation:

• The value of the Ethiopian currency, the birr, dropped by approximately 30% following the easing of forex curbs by the country’s central bank.

• Economic Reforms:

• The National Bank of Ethiopia (NBE) announced a shift towards a competitive market-based determination of the exchange rate. This reform aims to correct a long-standing economic distortion in Ethiopia.

• Under the new system, banks can now buy and sell foreign currencies at freely negotiated rates, with limited central bank intervention.

• IMF Support:

• The IMF board approved a four-year loan program worth around $3.4 billion to support Ethiopia’s economic reforms, with $1 billion immediately disbursed.

• IMF Managing Director Kristalina Georgieva highlighted this as a landmark moment for Ethiopia, noting the country’s commitment to transformative reforms.

• Challenges:

• Ethiopia faces multiple economic challenges, including $28 billion of external debt, 20% inflation, and a shortage of foreign currency reserves.

• The country has been battered by armed conflicts, the COVID-19 pandemic, and climate shocks.

• Future Plans:

• The NBE hinted at opening Ethiopia’s securities market to foreign investors, with further details to be announced soon.

• Other measures include allowing exporters and commercial banks to retain foreign exchange, increasing supply to the private sector, and introducing non-bank foreign exchange bureaus.

• Government Support:

• The government plans to temporarily subsidize essential imports like fuel, fertilizers, medicines, and edible oils.

• Financial support will be provided to low-income families and public service salaries will be bolstered.

Economic Impact and Outlook

• Mixed Reactions:

• Economist expressed concerns that the forex reforms might exacerbate the economic crisis by increasing inflation and noted that ensuring peace and security is crucial for attracting foreign investment.

• In contrast, business analyst was optimistic, suggesting that the financial cushion from international lenders could help stabilize the country’s currency and narrow the gap between official and black-market rates, potentially benefiting exports, including mining.