Navigating Ethiopia's Currency Upheaval: Challenges and Opportunities Amid Economic Reforms

In the heart of Ethiopia's bustling capital, Addis Ababa, the ripple effects of the country's recent currency liberalization are being felt acutely by businesses and consumers alike. As the birr, the national currency, has lost a third of its value against the US dollar, the impact on everyday life has been profound, forcing Ethiopians to adapt to a new economic landscape.

Empowering Exports, Empowering Businesses: Ethiopia's Currency Reforms

Embracing a Floating Exchange Rate

Ethiopia's decision to let its currency float freely against the dollar was a bold move, driven by the need to address the country's persistent trade imbalance. With exports, primarily in the form of flowers, tea, and coffee, bringing in just $11 billion last year, compared to $23 billion in imports, the government had little choice but to take action. The previous peg to the dollar had become unsustainable, and international investors had long argued for a more flexible exchange rate.The transition has not been without its challenges. The birr lost a third of its value overnight, and the decline has continued, with the currency now trading at 112 birr to the dollar, compared to 55 birr before the change. This has had a significant impact on the lives of ordinary Ethiopians, with prices for essential goods and services rising by as much as a third.

Empowering Exports, Empowering Businesses

However, the government and economic experts believe that the reforms will ultimately benefit the country in the long run. By making exports more competitive, the new exchange rate system is expected to boost the country's trade balance and provide much-needed foreign currency. Additionally, the reforms include new rules that will give more businesses access to dollars, which were previously reserved for key strategic sectors.This increased access to foreign currency is expected to allow businesses to import raw materials and machinery more easily, enabling them to increase their productivity and output. Prime Minister Abiy Ahmed has hailed the reforms as "critical to relieving (foreign currency) shortages, removing constraints to private sector investment and growth."

Tackling the Black Market and Smuggling

Another potential benefit of the currency reforms is the ability to undermine the black market and smuggling activities that had flourished under the previous fixed exchange rate system. By closing the gap between the official dollar rate and the black market rate, which was around double before the reform, the government hopes to bring more trade back into official channels, boosting tax revenues and reducing the illicit flow of goods.However, the road ahead is not without its challenges. Tewodros Makonnen Gebrewolde, an economist with the International Growth Center (IGC), acknowledges that "the pill is hard to swallow in the short term." The high inflation, exacerbated by the COVID-19 pandemic, the war in Ukraine, and the country's own internal conflicts, has already taken a toll on the population, with a third of Ethiopians living below the poverty line.

Restoring Faith and Confidence

For many Ethiopians, the currency reforms have eroded their trust in the government's ability to manage the economy effectively. Abrish, a civil servant whose name has been changed due to his concerns about criticizing the government, expressed his skepticism, saying, "I don't see the situation improving."Rebuilding this trust and confidence will be crucial for the success of the reforms. The government's promises of better access to foreign currency for companies and the potential benefits of increased productivity and growth will need to be realized for the reforms to be truly effective.As Ethiopia navigates this challenging economic landscape, the country's resilience and adaptability will be put to the test. The path ahead may be difficult, but the potential rewards of a more competitive and sustainable economy are significant. With the right policies, support, and commitment from both the government and the people, Ethiopia may emerge from this currency upheaval stronger and more prosperous than ever before.