Ethiopia has joined Nigeria to float its currency to meet funding requirements from the International Monetary Fund (IMF)
On Monday, July 29, the Ethiopian Central Bank declared the floatation of the national currency, the Birr, causing the currency to immediately drop by 30%, exchanging at Br74.73 to US$ against Br57.48 to US$ at the close of banking business on Friday.
The bank’s decision is also to enable it to deal with long-term debts and restructuring of payments.
Ethiopia became the third African nation to default on IMF loans, following Ghana and Zambia, due to rising inflation and foreign currency exchanges, among other factors, which have impacted its borrowing power.
However, the nation has been in discussions with the IMF over a new lending program that will enable them to get more foreign input to their economy, and this comes after the last fundraising program was abandoned due to the civil war in Tigray.
Part of the reforms dictated by the Central Bank includes allowing banks to buy/sell foreign currencies to customers amongst themselves at negotiable rates without the interference of a middleman.
The statement from the apex bank said, “Banks are henceforth allowed to buy and sell foreign currencies from/to their clients and among themselves at freely negotiated rates.”
Desperate for Cash
The Prime Minister, Mr Ably Ahmed, announced these reforms on Sunday. The Central Bank Governor, Mamo Mureru, added that as part of the reforms, the nation will receive an additional $10.7 billion in funding from various sources, such as the IMF, World Bank, and other creditors.
Some investors have praised this move’s impact. They have expressed relief, as they were previously forced to purchase foreign currency from the black market, and this move has eliminated that, as they can mostly go directly to the banks.
However, like in Nigeria, this move could potentially create midterm inflationary pressures unless the government utilizes additional tools to mitigate it.
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