Ethiopia Announces Birr Devaluation Ahead of a Key IMF Meeting

Ethiopia today announced birr devaluation hours before the start of talks between the Ethiopian government and the International Monetary Fund (IMF).

Ethiopian Prime Minister Abiy Ahmed published details of new macro economic reforms today. One of the key points he announced is that birr exchange rate will not be fixed by the government. FX rate will be determined by market forces. The decision to liberalize foreign exchange market is set to take effect on Monday, July 29, 2024.

This is the first time in 50 years that an Ethiopian government has introduced a new system to determine the value of its currency. Prime Minister Abiy Ahmed justified this move by saying that this decision is a necessary measure to address deep-seated economic structural issues, including foreign exchange distortions and macroeconomic imbalances.

“The liberalization is expected to enhance the competitiveness and inclusiveness of the financial sector, ultimately promoting a more resilient and sustainable economic environment,” he stated.

The official birr exchange rate currently stands at 58.6 birr against $, while in black market the birr is trading at around 115 birr per $.

The government did not share details of how much birr will be devalued. At an earlier meeting between IMF and Ethiopian government delegations in April, IMF asked the Ethiopian government to devalue birr by 60%. It seems that the birr is likely to be devalued immediately by around 20%. On Monday, the Ethiopian government delegation and IMF team are due to meet to make an announcement about a bailout package. Ethiopia is expected to get around $10 billion from the financial institutions.

While the government today announced that it will support low income classes including government officials, the birr devaluation is set to lead to a rise in food inflation.