Ethiopia Faces Economic Turmoil as Birr Devalued by 30%
Ethiopia has recently taken a drastic step in its economic policy by devaluing its currency, the birr, by 30% against major currencies. This significant move has made importing goods increasingly challenging for businesses in Africa's second-most populous country. Reports indicate that prices for various goods have nearly doubled since the floating of the birr last July, leading to severe inflationary pressures. Traders express their struggles to import goods at reasonable prices, which has had a detrimental impact on their operations.
The economic situation in Ethiopia has been exacerbated by a series of crises, including the Covid-19 pandemic, the ongoing war in Ukraine, severe drought conditions, and the conflict in Tigray. In 2022 alone, inflation surged by 30% compared to the previous year, largely due to these factors. The floating of the birr, which transitioned from a controlled economy to a more market-oriented approach, has seen the currency's value plummet from 55 birr to the dollar to approximately 112 birr, aligning closely with the black market rates.
With 34.6% of Ethiopia's population living below the poverty line, the economic reforms pose a significant risk to many citizens. However, economist Tewodros Makonnen Gebrewold from the International Growth Centre believes that while the short-term effects may be painful, the long-term benefits could lead to increased productivity as businesses gain better access to foreign currency. The Prime Minister, Abiy Ahmed, has described this currency float as an “inevitable” reform aimed at enhancing the attractiveness of Ethiopia's economy for private sector investment and fostering growth.
