Ethiopia’s Bold Move: Ending 50 Years of Currency Control
In a historic shift, Ethiopia has ended its half-century-long control over the birr, its national currency. Driven by unmanageable debts and dwindling foreign reserves, this decision marks a significant turning point for the Horn of Africa nation.
In July 2023, Ethiopia liberalized its exchange rate regime, securing $3.4 billion from the International Monetary Fund (IMF) and $16.6 billion from the World Bank. This financial lifeline is crucial as the country navigates economic challenges exacerbated by wasteful public spending, the pandemic, and a two-year civil war in the Tigray region.
The government's decision to float the birr resulted in a 30% depreciation against the US dollar, aligning the official rate with the parallel market. This bold step facilitated talks with creditors to restructure its $28.9 billion external debt and allowed commercial banks to set exchange rates, while non-bank entities began operating foreign-exchange bureaus for the first time.
Ethiopia's journey to this point has been fraught with challenges, including a heavy debt burden and a dearth of foreign currency. Previous attempts to control the currency through the central bank and restrict imports led to a lively parallel market where US dollars fetched more than double the official rate.
As Ethiopia embarks on this new economic path, the world watches closely to see how these reforms will impact its financial stability and growth prospects.