The National Bank of Ethiopia (NBE) has decided to allow market forces to determine the value of its currency, the birr, and eased restrictions on the amount of foreign currency held by commercial banks and exporters as part of a raft of measures to increase the supply of dollars and boost economic activity in a country plagued by rising inflation and severe hard currency shortages.
Prime Minister Abiy Ahmed's government is under increasing pressure from the World Bank and International Monetary Fund (IMF) to float the country's currency and implement critical reforms in the foreign exchange market as a condition for unlocking more than $10 billion in fresh funding.
In a statement on Monday, the NBE announced the reforms, which include opening up the proposed stock market to foreign investors, introducing non-bank foreign exchange bureaus to buy and sell foreign currency, and removing restrictions on the amount of dollars travellers can take in and out of the country.
“The reform introduces a competitive, market-based determination of the exchange rate and addresses a long-standing distortion within the Ethiopian economy,” the bank said. “Ethiopia’s foreign exchange reform is just one part of a wider package of economic reforms that are being implemented and accelerated over the coming months.”
The birr fell 30 per cent against the dollar to 74.73 per dollar on July 29, from 57.48 on July 26, after trading restrictions were lifted, according to Reuters.
The reform package, based on the country's Home-Grown Economic Reform Plan (HGER 2.0), aims to restore macroeconomic stability, boost private sector activity and ensure sustainable, broad-based and inclusive growth.
“The foreign exchange reforms being announced today (July 29) involve significant new policy changes in the following areas: a shift to a market-based exchange regime where 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 central bank said.
Foreign exchange will now be retained by exporters and commercial banks to substantially increase the supply of foreign exchange to the private sector, effectively eliminating the previous surrender requirements to the NBE.
Import restrictions, which previously prohibited 38 product categories, have been removed, allowing for a broader liberalisation of the foreign exchange market for imports of goods and services, while capital account outflows remain restricted as before.
The rules for allocation of foreign exchange by banks, which were based on a waiting list system for different categories of imports, have been abolished, while the foreign exchange retention rules for exporters have been improved, allowing them to retain 50 per cent of their foreign exchange proceeds, up from 40 per cent.
The NBE has also simplified the rules for foreign currency accounts, especially those currently held by foreign institutions, foreign direct investors and the diaspora, and allowed residents to open foreign currency accounts based on remittances, transfers from abroad, foreign exchange-based salary or rental income and other specified cases, as well as the ability to use such foreign currency accounts for payments for foreign services.
Other measures include the removal of interest rate ceilings that previously applied to private companies or banks when borrowing from abroad, the opening of the Ethiopian securities market to foreign investors under terms and conditions to be specified later, and the reconciliation of various rules on the amount of foreign currency that travellers may carry into or out of Ethiopia.
The central bank has also granted special foreign exchange privileges to companies in special economic zones, including the ability to retain 100 per cent of their foreign exchange earnings.
“The reform in the exchange rate system being introduced today is challenging in several respects, but at the same time, it is critically necessary,” the NBE said.
It added that: “The prevailing foreign exchange rate system, though initially meant to help ensure a stable exchange rate and low inflation, has instead resulted in the emergence of an unanchored parallel market exchange rate, together with high inflation.”
On December 20, 2019, the IMF Board approved a three-year arrangement under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) for Ethiopia, worth about $2.9 billion, to help the country implement the Homegrown Economic Reform Plan, maintain macroeconomic stability, and improve living standards.
However, the programme was suspended due to conflict in the northern region of Tigray, and negotiations resumed after a peace deal in November 2022.
Last year, in the wake of a financial crisis triggered by the Covid-19 pandemic and the two-year war in Tigray, Addis defaulted on a $33m coupon payment on its Eurobond, joining Zambia and Ghana, which also defaulted on their external financial obligations.
Ethiopia's public debt stood at $65.82 billion as of March 31, 2024, according to the country's Finance ministry, with the total external debt increasing by 0.5 per cent to $28.38 billion from $28.24 billion as of June 30, 2023.
