Following the adoption of a flexible exchange rate policy by the central bank of Ethiopia on December 9, 2024, with support from the International Monetary Fund (IMF), the value of the Ethiopian birr has experienced a significant decrease of thirty percent.
In spite of the fact that this action, which is a component of a bigger economic reform initiative, is intended to stabilize the economy, it has immediate effects, such as an increase in inflation, an increase in the cost of imports, and an increase in the cost of living for the average Ethiopian.
The goal of the transition from a set exchange rate to a market-driven exchange rate was to reduce the amount of foreign money that was traded on the illicit market and to encourage economic expansion. The approach is also considered as a way to get further assistance from the International Monetary Fund (IMF) and to attract foreign investment, both of which are essential for Ethiopia's economic recovery from previous conflicts and global economic issues.
With that being said, this depreciation presents a number of challenges:
As a result of the increased cost of importing goods, inflation is anticipated to rise, which will have an effect on the prices that consumers pay. The devaluation of the birr could, on the bright side, make Ethiopian exports more competitive on the worldwide market, which could potentially support important industries. On the other hand, servicing debt denominated in foreign currency now demands a greater amount of birr, which puts pressure on the government's budget.
Responses from both the general public and corporations are contradictory. Urban people are concerned about the cost of living, and social media has brought attention to the dissatisfaction of the general public. Exporters may gain from the weaker currency, while importers may suffer greater costs as a result of the weaker currency.
A response has been provided by the government in the form of assurances of subsidies for critical items and attempts to promote manufacturing within the country. In addition to expressing its support for the strategy, the International Monetary Fund (IMF) has emphasized the importance of further reforms in governance and economics.
The decision to alter Ethiopia's economic policy is of critical importance. In addition to presenting potential for growth through exports and investments, it also presents immediate obstacles such as the management of inflation concerns. There is a direct correlation between Ethiopia's ability to successfully manage these economic adjustments in the near future and the success of these reforms.
Investors and members of the international community are keeping a close eye on Ethiopia's predicament because it has the potential to establish a standard for economic policy in Africa and to provide insight into how developing countries approach reforms funded by the International Monetary Fund.