Ethiopian Birr Slides Sharply Against Dollar on First Day of Floating

Ethiopians woke up this morning with nearly 30pc of their purchasing power shaved off in dollar equivalents as markets responded to the floated currency. The buying and selling rates of the Birr against the dollar at the Commercial Bank of Ethiopia surged from around 57.1 and 57.6 birr when markets closed yesterday to nearly 74.3 and 76 birr respectively.

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While a gradual equilibrium price is expected between the official and parallel markets, the dollar is selling for around 128 birrr in the black market, higher than its previous day’s average of 115 birr.

Speculation is also high in the early periods of these developments. A popular website that tracks the black-market rate in Ethiopia has crashed due to high traffic.

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“We are aware that the website is currently experiencing slow loading times due to an unexpected surge in traffic. Our servers are under heavy load, and we are working diligently to upgrade them,” shared the website admins on their Telegram channel.

A series of policy statements released on social media by Prime Minister Abiy Ahmed’s Office late yesterday beckoned the shift from the managed float exchange regime policy in practice for over the past few decades to a fully market-based model.

The shift comes as part of a comprehensive economic reform program supported by the International Monetary Fund (IMF), which is attached to nearly 10.7 billion dollars in financing from a mix of international creditors like the World Bank and the International Finance Corporation.

However, an agreement between the Fund and Ethiopia entails much more than credit assistance, as it is a precondition for debt restructuring under the Common Framework mechanism of G-20 countries. Ethiopia’s external debt stock is around 28 billion dollars, according to recent publications by the Finance Ministry.

Central Bank governor Mamo Mihretu outlined the comprehensive set of reforms under the new exchange regime early Monday morning. Green light for non-banking exchange bureaus, a 10pc increment in FX retention by exporters, removal of the waiting list for foreign currency during import, and an overall hands-off approach to foreign exchange control were highlighted by the governor.

“Sources of macroeconomic instability will be addressed by the reforms,” Mamo said.

The National Bank of Ethiopia (NBE) will be limited to publishing an indicative daily exchange rate, which will serve as a mere reference price with no mandatory enforcement on the dealings between market participants.

Economists have forewarned of the worsening of inflationary pressures short of robust FX reserves by the Central Bank. Mamo indicated that wage adjustments for civil servants and subsidies on essential commodities will be extended to mitigate the sharp pangs of the changes.