Ethiopia Devaluates Birr by 30% to Secure IMF Deal

Ethiopia’s central bank has allowed the local currency Birr to trade freely under a major reform needed to secure more than $10 billion in funding and debt relief as part of the government’s negotiations with the International Monetary Fund (IMF).

The decision to ease restrictions on the foreign exchange system, announced by the central bank on Monday, sent the birr tumbling by about 30%.

The move was unveiled as the debt-stricken country awaits a multibillion-dollar deal to secure much-needed funding from the International Monetary Fund after lengthy and difficult negotiations.

There has been widespread speculation that Ethiopia, where the state controls the economy, will have to devalue its currency as a condition for IMF support.

The National Bank of Ethiopia announced a series of foreign exchange reforms that it said included “significant new policy changes.” The first step, it said in a statement, would be “a transition to a market-based exchange rate system.”

“Banks are therefore allowed to buy and sell foreign currencies to and from their clients and among themselves at freely negotiated prices, with the National Bank of Ethiopia intervening only to a limited extent to support the market initially and if justified by unregulated market conditions,” it added.

The Commercial Bank of Ethiopia said in a statement posted on its X account that the dollar is being bought at 74.73 birr and sold at 76.23 birr. The buying price of the US currency last Friday was 57.48 birr and the selling price was 85.64 birr.

Until now, the National Bank of Ethiopia has been setting the price of the birr, a non-convertible and non-exportable currency, on a daily basis.

The central bank also announced that it would allow exporters and commercial banks to hold foreign exchange, which “will therefore sustainably enhance the supply of foreign currency to the private sector.”

Prime Minister Abiy Ahmed said earlier this month that he expected $10.5 billion in financial support in the coming years once his country concludes negotiations with international lenders.

The Horn of Africa nation, which has been wracked by armed conflict in recent years and has suffered from the effects of Covid and climate-related shocks, has been in protracted talks to secure a support programme from the IMF.

The country has around $28 billion in external debt, is suffering from high inflation and has low foreign exchange reserves.

Official creditors providing financing through bilateral agreements agreed this month to provide financing guarantees to the Horn of Africa nation to help speed up approval by the IMF board of directors of a new loan.

The guarantees mean that creditors, such as the Paris Club and China, have given assurances that they will restructure their loans to Ethiopia in a way that is consistent with the IMF programme.

Fitch Ratings downgraded the country’s credit rating to partial default in December after it failed to pay a coupon on a $33 million Eurobond.

The two-year conflict in the northern Tigray region that ended in November 2022 has led to the suspension of many development and budget support programs.

As Ethiopia seeks to gradually liberalize its economy, it plans to launch a financial market to help finance the government’s plans.