Price Instability in Ethiopia due to Forex Reforms

Price Instability in Ethiopia due to Forex Reforms

Sub: Eco

Sec: External sector

• Impact of Flexible Exchange Rate Policy:
  • Ethiopia’s government implemented a flexible exchange rate policy last month, leading to the Ethiopian birr losing 60% of its value against the dollar.
  • This significant devaluation has resulted in spiraling inflation and increased anxiety among consumers as they face higher prices for basic commodities.
• Businesses Struggling with Inflation:
  • Businesses in Addis Ababa, including hotels and supermarkets, are struggling to keep up with the rapid inflation.
  • Price updates have become frequent—sometimes occurring daily or even hourly—as businesses adjust to the changing market conditions.
  • Supermarkets are hoarding products in warehouses and selling only small quantities to avoid punishment by city authorities.
• Government Crackdown on Hoarding:
  • In response to the crisis, the Addis Ababa City Trade Bureau has been cracking down on businesses accused of hoarding.
  • More than 3,000 stores have been closed across the country for this reason.
  • Police have raided warehouses, confiscating large quantities of goods like 800,000 liters of edible oil, which were then distributed at previous prices through local cooperatives.
• Historic Exchange Rate Policy Change:
  • The government’s decision to allow commercial banks to set foreign exchange prices and permit non-bank entities to operate foreign exchange bureaus is considered a historic shift.
  • Previously, the government had fixed the price of foreign currencies, leading to the flourishing of a black market.
• IMF’s Involvement:
  • The International Monetary Fund (IMF) approved a four-year credit facility worth $3.4 billion to support Ethiopia’s reforms.
  • An initial disbursement of $1 billion was made to address urgent needs.
  • IMF Managing Director Kristalina Georgieva called the reforms a “landmark moment for Ethiopia”.
• Challenges with Essential Commodities:
  • Ethiopia, which imports many essential goods, is struggling to cope with the new policy’s impact.
  • Although authorities imported 14 million liters of edible oil to help ease the situation, this has been insufficient given the rising prices of other essential goods.
• Impact on Fixed-Income Earners:
  • Those with fixed incomes are expected to be the most affected by the floating of the birr.
  • Getachew T. Alemu, a public policy specialist, warned that the situation could worsen unless cautious policy actions are taken.
• Government Inconsistencies:
  • Despite the government’s crackdown on price speculators, it has raised the price of passports from 2,000 to 5,000 birr, adding to the financial burden on citizens.
  • This price hike has shocked individuals like Almaz Teferi, who was saving to obtain a passport in hopes of finding work abroad.