Prime Minister of Ethiopia today announced to devalue official currency birr. The devaluation has come at the heels of a key meeting between the Ethiopian government and the International Monetary Fund (IMF).
Abiy Ahmed, the Ethiopian Prime Minister, today shared details of new macro economic reforms. One of the key reforms is the liberalization of foreign exchange market. The exchange rate will now be determined by market forces. It will no longer be fixed by the government. This is the first time in decades that the government has introduced market based foreign exchange rate system. The new FX has taken effect on Monday, July 29, 2024.
Today, the Ethiopian government and IMF delegations are meeting to make a final decision about Ethiopian request for a bailout package. Ethiopia is expected to get around $10 billion dollar from financial institutions under this package.
One of the preconditions by IMF for the approval of this bailout package has been devaluation of Ethiopian currency birr. Dollar to Birr official exchange rate is around 58 birr per dollar. But in black market, birr has lost its value significantly. It is trading at around 117 birr per dollar.
How much will be the devaluation of birr? IMF in April proposed that Ethiopian government should devalue birr by 60% and let the market determine real exchange rates. Ethiopia has been resisting pressure from IMF to devalue birr by more than 20%. The birr has been devalued around 30%, according to the new foreign exchange rates published by the Commercial Bank of Ethiopia.
The birr devaluation is set to lead to rise in inflation. World Food Program, in May, warned against devaluation of birr, saying that the depreciation could push more dependency on foreign food aid.
The government today announced it would take care of those sections of society which will be immediately affected by the new macro economic reforms. It remains to be seen which measures government will take to mitigate the effect of currency devaluation of rise in food inflation.
Prime Minister Abiy Ahmed justified the decision of new reforms saying the it would address deep-seated economic structural issues, including foreign exchange distortions and macroeconomic imbalances.
“The liberalization is expected to enhance the competitiveness and inclusiveness of the financial sector, ultimately promoting a more resilient and sustainable economic environment,” he stated.
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