June 20, 2024

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Ethiopian Government negotiations with IMF and world bank

IMF & World Bank Push Ethiopia to Devalue Birr

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The Ethiopian government is engaged in discussions with international financial institutions to secure substantial loans. Specifically, they are in talks with the International Monetary Fund (IMF) to obtain a loan of approximately $3.5 billion. Concurrently, they are also negotiating with the World Bank to acquire a similar figure of around $3.5 billion.

Ethiopia has been in talks with the IMF for more than a year. Ethiopia wants a bailout package of more than $3 billion. The two sides have held several rounds of discussions in Ethiopia and abroad.

These negotiations aim to provide Ethiopia with the necessary financial resources to address its economic challenges and support various development initiatives within the country.

Recently, the federal government opened up certain businesses to foreigners. These businesses include import, export, wholesale, and retail. This decision could be part of arrangements with IMF and World Bank.

At the start of April 2024, the Ethiopian government decided to open import, export, wholesale, and retail trade sectors for foreigners. Ethiopian Investment Board issued a new directive permitting foreign investment in exporting crops like coffee, oilseeds, pulses, hides, and skins. Read More…

Reportedly, the National Bank of Ethiopia (NBE) has some goals. One goal is to make the exchange rate more stable. NBE wants to avoid big differences between the official rate and the parallel market rate.

Another goal is to increase the currency reserves of Ethiopia. Right now, the reserves can only cover 0.7 months of imports. NBE wants to increase this to 1 month’s worth by the end of this fiscal year. It also plans to further increase the reserves to cover 2 months of imports by June 2025.

These steps aim to make the foreign exchange market more steady. It will also help Ethiopia pay for more imports. This will make the economy stronger overall.

“Devaluing the Birr may be part of the strategy to achieve these targets, and this may have implications on the food security of vulnerable people,” states the World Food Programme document. It notes that the IMF, World Bank, and other experts are in favor of devaluation.

The World Bank and IMF believe Ethiopia’s currency is overvalued. They say high prices are caused by things like instability and rising global costs, not currency devaluation.

However, the World Food Programme (WFP) is worried about devaluing the currency. They think it could make inflation even worse. This would hurt low-income people the most. The WFP believes devaluation will make imported goods like fuel, fertilizers, and farm supplies more expensive. This will then increase the cost of producing food.

So there are different views on whether devaluing the currency is a good idea or not. Some experts support it, while others warn it could make things worse for the economy and people.

The official exchange rate set by the Ethiopian government is significantly lower than the rate in the unregulated parallel market. This parallel market rate has climbed much higher, indicating a large gap between the two exchange rates.

Over the past few years, the birr has steadily lost value in both markets, but the depreciation has been more severe in the parallel market. The difference between the official and parallel rates, known as the premium, has grown from around 17% in early 2020 to over 100% as of March 2024.

This widening gap is causing problems. More remittances and foreign currency are being channeled through the parallel market, bypassing official channels. Illegal money transfer services are also growing, as Ethiopians abroad send money to local intermediaries who pay at a higher parallel rate.

The birr’s decline is driven by a combination of economic challenges – high inflation, political unrest, reduced foreign investment, and falling export earnings. The government’s gradual devaluation policy since 2019 has not been able to close the gap with the parallel market rate.

In summary, the growing divergence between the official and parallel exchange rates is a symptom of Ethiopia’s economic difficulties and is leading to distortions in currency flows.