Ethiopia’s central bank floated the country’s birr currency on Monday, a move it hopes will secure International Monetary Fund (IMF) support and make progress on a long-delayed debt restructuring.
The birr’s value against the U.S. dollar slumped by 30% to 74.73 per dollar, the country’s biggest lender, Commercial Bank of Ethiopia said. The currency had been trading at 57.48 birr to the dollar on Friday.
The Horn of Africa nation, which has been struggling with soaring inflation and chronic foreign currency shortages, became the third economy on the continent in as many years to default on its government debt late last year.
It has been in talks with the IMF to establish a new lending programme, after the last fund-supported programme agreed in 2019 was abandoned due to conflict in the northern region of Tigray. Negotiations resumed after a November 2022 peace deal.
The central bank said in a statement on the float that “banks are henceforth allowed to buy and sell foreign currencies from/to their clients and among themselves at freely negotiated rates” and that it would only make “limited interventions” in the FX markets going forward.
The reforms were initially announced by Prime Minister Abiy Ahmed late on Sunday.
Central bank governor Mamo Mihretu said in an online video that, as part of the reforms, Ethiopia would get $10.7 billion in external financing help from the IMF, the World Bank, and other creditors.
Wall Street’s major indexes ended higher on Friday,
“The IMF and World Bank are both providing exceptional and front-loaded funding support that will be among their highest such allocations in the African continent,” he said.
Importers, who had been relying on the black market to secure dollars, expressed relief at the central bank’s move.
“Now I don’t need to go to black market to buy or sell dollars. It is now a market-based foreign exchange regime, so (we) will buy or sell based on the legal channels,” said a businessman in the capital Addis Ababa, who did not want to be named.
There was no immediate comment from the IMF. Ethiopia’s main $1 billion dollar government bond fell fractionally on Monday having reacted its highest level since early 2022 in recent weeks.
The United States welcomed the shift to a market-determined foreign exchange rate.
“Market-based FX is a difficult, but necessary step for Ethiopia to address macroeconomic distortions,” the U.S embassy in Addis Ababa posted on social media platform X.
Ethiopia, which is Africa’s second-most populous country, requested a debt restructuring under the Group of 20’s Common Framework process in early 2021, but progress was slowed by the civil war in Tigray.
The government has already unveiled some economic reforms, which analysts say are linked to the negotiations for a new IMF reform program, including the adoption of an interest rate-based monetary policy earlier this month.