Ethiopia has announced plans to liberalize her foreign exchange market effective today, ahead of the IMF meeting.
- The exchange rate of the Ethiopian Birr will be determined by market forces for the first time in over half a century.
- The Ethiopian government seeks to anchor inflation, bolster the financial sector and improve the investment environment at large.
- This presents a myriad of opportunities to both domestic and foreign investors considering the initial, tighter regime that surrounded the financial sector, lagging Ethiopia’s development compared to other developing countries.
“The liberalization is expected to enhance the competitiveness and inclusiveness of the financial sector, ultimately promoting a more resilient and sustainable economic environment,” Prime Minister Abiy Ahmed stated while making the announcement.
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Key Aspects of the Reforms
- Banks in Ethiopia will now buy and sell foreign currencies with little intervention from the National Bank of Ethiopia (NBE).
- Exporters and commercial banks can retain foreign exchange earnings, boosting FX supply to the private sector.
- Import restrictions on 38 previously prohibited products removed.
- Exporters will now be allowed to retain 50 percent of their FX proceeds against a previous 40 percent.
- Interest rate ceilings previously subjected to the private sector when borrowing from abroad have been scrapped.
- Foreign investors will now access the Ethiopia securities market albeit under specified terms and conditions.
- Rules entailing the amount of foreign currency cash notes travelers may carry in and out have been relaxed enhancing flexibility.
- Companies within the Special Economic Zones will have the ability to retain up to 100 percent of their FX earnings.
Why is the Move Important?
The move to float the currency seeks to enhance supply of foreign currency critical in importation. By opening doors to foreign investors, the Ethiopian market will become more attractive in turn boosting foreign direct inflows essential for economic growth.
Export competitiveness will be enhanced forcing companies to match customers’ needs and capture substantive market share.
Macroeconomic Impacts
The anticipated rise in value of the Birr against the greenback by at least 50 percent presents short term pinches to the quite stable economy.
At the open of today’s Ethiopian foreign exchange market, the Birr’s value depreciated by at least 30 per cent to 74.73 per dollar from a median of 57.48 on Friday last week.
“Amidst the new Ethiopian market liberalization, all exchange rates on the largest bank have increased by at least 28 per cent in one day” Capital Markets Ethiopia shared on their socials.
With the looming consequential economic destructions, the Ethiopian government intends to introduce temporary subsidies on certain essential imports such as fuel, fertilizer, medicine and edible oil.
Further, the government intends to supplement civil servants salaries to cushion them from the anticipated inflation.
Ethiopia has also been having talks with the International Monetary Fund in a bid to roll out a new lending programme.
“The IMF and World Bank are both providing exceptional and front-loaded funding support that will be among their richest allocation in Africa,” Central bank Governor, Mumo Mihretu said.
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