Ethiopia launched a major macroeconomic reform on July 29, 2024, signaling a significant shift in the country’s economic policy. The reforms include the adoption of a floating exchange rate system and the use of interest rates as a policy tool to stabilize the economy.
A key aspect of the reform, issued by the National Bank of Ethiopia (NBE), is the alignment of the official and parallel exchange rates, which has long been a source of market distortion. Within a month of transitioning from a fixed to a market-based exchange rate, the gap between the official and black market rates narrowed dramatically, dropping from over 100% to just 4%. However, this was accompanied by a substantial depreciation of the birr.
The reforms also allow exporters to retain 50% of their foreign exchange proceeds, lift import restrictions on 38 product categories, and permit non-bank entities to conduct foreign currency transactions, boosting competition. Special Economic Zones (SEZs) benefit from 100% retention of foreign exchange earnings, while foreign currency account rules have been simplified and the securities market has opened to foreign investors. These changes are supported by a $10.7 billion financial package from international partners, including the IMF and World Bank, to aid implementation.
While these reforms are expected to spur economic growth, economists warn of potential inflationary pressures, particularly on import costs and living expenses. Policymakers must carefully manage these risks to ensure the reforms result in sustainable, inclusive growth, while protecting vulnerable populations during the transition.
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