Ethiopia has made a significant economic shift by ending 50 years of strict currency control over the Birr, driven by unsustainable foreign debts and declining foreign reserves. This bold move aims to secure urgent financial support, including $3.4 billion from the International Monetary Fund (IMF) and $16.6 billion from the World Bank. The liberalization is a response to a thriving parallel market and a desperate economic situation exacerbated by internal conflicts and droughts.
Historically, Ethiopia's government maintained strict control over the birr's exchange rate, leading to a parallel market where 80% of foreign currency trades occurred at inflated rates. The economic crises, including a default on debt securities in December 2023, forced the government to take drastic measures to stabilize the economy. However, the liberalization of the currency has led to increased living costs, despite government subsidies.
The path to economic recovery remains uncertain, with ongoing conflicts complicating reform efforts. Nevertheless, the devaluation of the birr and anticipated inflows from international financial institutions may help stabilize the foreign exchange market and attract foreign investment. Ethiopia's future economic success will hinge on achieving political and social stability to support these reforms.
