Written by Dawit Endeshaw
ADDIS ABABA (Reuters) – Ethiopia’s central bank decided to float the country’s birr currency on Monday, a move the government hopes will secure International Monetary Fund support and make progress on a long-delayed debt restructuring.
The Commercial Bank of Ethiopia, the country’s largest lender, said the birr fell 30% against the U.S. dollar to 74.73 birr to the dollar. The currency was trading at 57.48 birr to the dollar on Friday.
The Horn of Africa nation, which has been struggling with high inflation and a chronic shortage of foreign currency, became the continent’s third economy in two years to default on its government debt late last year.
Addis Ababa had been in talks with the International Monetary Fund to set up a new lending programme, after the last fund-backed programme agreed in 2019 was abandoned due to conflict in the northern Tigray region. Negotiations resumed after a peace deal in November 2022.
The central bank said in a statement on the float that “banks are henceforth allowed to buy and sell foreign currencies to and from their clients and among themselves at freely negotiated prices” and that it would only make “limited interventions” in foreign exchange markets in the future.
Prime Minister Abiy Ahmed announced the reforms late Sunday.
As part of the reforms, Ethiopia will receive $10.7 billion in external financing assistance from the International Monetary Fund, the World Bank and other creditors, central bank governor Mamo Mehretu said in an online video.
“The International Monetary Fund and the World Bank are providing exceptional and advanced financing support that will be among their highest such allocations on the African continent,” he added.
Importers, who had been relying on the black market to secure dollars, expressed relief at the central bank’s move.
“Now I no longer need to go to the black market to buy or sell dollars. The system is now market-based in dealing with foreign exchange, so we buy or sell based on legal channels,” said a businessman in the capital, Addis Ababa, who asked not to be named.
There was no immediate comment from the IMF. Ethiopia’s main $1 billion government bond fell slightly on Monday after hitting its highest level since early 2022 in recent weeks.
The United States welcomed the shift to a market-determined foreign exchange rate.
The US Embassy in Addis Ababa posted on the social media platform X that “the market-based exchange rate is a difficult but necessary step for Ethiopia to address macroeconomic distortions.”
Ethiopia, Africa’s second-most populous country, requested a debt restructuring under the G20 Common Framework process in early 2021, but progress has been slowed by the civil war in Tigray.
The government has already unveiled some economic reforms, which analysts say are linked to negotiations over a new IMF reform programme, including the adoption of an interest-rate monetary policy earlier this month.