Ethiopia Receives IMF Relief After Easing Forex Curbs

Ethiopia Receives IMF Relief After Easing Forex Curbs

Sub: IR

Sec: Int org

Background:

• Ethiopia has recently eased foreign exchange curbs as part of a broad economic reform package.
• This move coincides with the International Monetary Fund’s (IMF) approval of a loan to Ethiopia, which is seeking a multibillion-dollar bailout.

Key Developments:

• Currency Devaluation:
  • The value of the Ethiopian currency, the birr, dropped by approximately 30% following the easing of forex curbs by the country’s central bank.
• Economic Reforms:
  • The National Bank of Ethiopia (NBE) announced a shift towards a competitive market-based determination of the exchange rate. This reform aims to correct a long-standing economic distortion in Ethiopia.
  • Under the new system, banks can now buy and sell foreign currencies at freely negotiated rates, with limited central bank intervention.
• IMF Support:
  • The IMF board approved a four-year loan program worth around $3.4 billion to support Ethiopia’s economic reforms, with $1 billion immediately disbursed.
  • IMF Managing Director Kristalina Georgieva highlighted this as a landmark moment for Ethiopia, noting the country’s commitment to transformative reforms.
• Challenges:
  • Ethiopia faces multiple economic challenges, including $28 billion of external debt, 20% inflation, and a shortage of foreign currency reserves.
  • The country has been battered by armed conflicts, the COVID-19 pandemic, and climate shocks.
• Future Plans:
  • The NBE hinted at opening Ethiopia’s securities market to foreign investors, with further details to be announced soon.
  • Other measures include allowing exporters and commercial banks to retain foreign exchange, increasing supply to the private sector, and introducing non-bank foreign exchange bureaus.
• Government Support:
  • The government plans to temporarily subsidize essential imports like fuel, fertilizers, medicines, and edible oils.
  • Financial support will be provided to low-income families and public service salaries will be bolstered.

Economic Impact and Outlook:

• Mixed Reactions:
  • Economist expressed concerns that the forex reforms might exacerbate the economic crisis by increasing inflation and noted that ensuring peace and security is crucial for attracting foreign investment.
  • In contrast, business analyst was optimistic, suggesting that the financial cushion from international lenders could help stabilize the country’s currency and narrow the gap between official and black-market rates, potentially benefiting exports, including mining.