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Ethiopia’s birr plunged 30% against the dollar after the central bank floated the currency as part of reforms aimed at correcting foreign exchange market distortions. The bank also eliminated foreign exchange surrender requirements and lifted restrictions on certain imports. In return, Ethiopia, which is seeking BRICS membership, is expected to receive a $10.7 billion loan package from the IMF, World Bank, and other creditors.
Ethiopia Moves to a Market-Based Exchange Rate
On July 29, the Ethiopian currency, the birr, plummeted 30% against the U.S. dollar, dropping from 57.48 birr per dollar on July 26 to 74.73 per dollar. This significant devaluation occurred after the National Bank of Ethiopia (NBE) abandoned its fixed exchange rate regime. The NBE’s decision to allow the birr to float is seen as an important step toward securing a financial bailout from the International Monetary Fund (IMF).
The central bank’s policy shift occurred one day after Prime Minister Ahmed Abiy’s government kickstarted comprehensive macroeconomic reforms. In an official statement, the NBE explained that these reforms aim to establish a competitive, market-based exchange rate. The implementation of this new arrangement will follow a fresh foreign exchange directive.
“A shift to a market-based exchange regime, whereby banks are henceforth allowed to
buy and sell foreign currencies from/to their clients and among themselves at freely
negotiated rates, and with the NBE making only limited interventions to support the market
in its early days and if justified by disorderly market conditions,” the NBE said.
Foreign Exchange Surrender Requirements Scrapped
The NBE has also lifted foreign exchange surrender requirements and restrictions on certain imports under a new arrangement. Previously, the NBE had set limits on the amount of U.S. dollars travellers could take out of the country, but the latest regulations relax rules on foreign currency cash notes for travellers.
Additionally, residents can now open foreign currency accounts based on remittances, transfers from abroad, foreign exchange-based salary or rental income, and other specified cases.
The reforms, part of Ethiopia’s Home-Grown Economic Reform Plan, aim to address foreign exchange distortions, support the country’s development stage, and enhance global integration. The NBE says the reforms will ensure proper capture and repatriation of foreign earnings for residents’ and productive sectors’ benefit.
In exchange for implementing these reforms, Ethiopia, which is seeking to join the BRICS bloc, is expected to receive $10.7 billion from the IMF, the World Bank, and other creditors.
