Cash-strapped Ethiopia eased foreign exchange restrictions on Monday (29/7) as part of a broad economic reform package, while the International Monetary Fund (International Monetary Fund/IMF) approved a loan to the country, which is seeking a multi-billion dollar bailout.
The exchange rate of the local currency, the birr, plunged about 30 percent after the move by the country's central bank.
“The reforms introduce competitive market-based exchange rate determination and address long-standing distortions in the Ethiopian economy,” the National Bank of Ethiopia (NBE) said in a statement.
Africa's second most populous country has been pinning its hopes on a rescue package of at least $10.5 billion from external lenders including the IMF, but negotiations have been long and tense.
The IMF board on Monday approved a four-year loan program worth about $3.4 billion to support reforms. About $1 billion will be disbursed immediately.
“This is a landmark moment for Ethiopia” and the loan is evidence of the country’s “strong commitment to transformative reforms,” IMF Managing Director Kristalina Georgieva said in a statement.
Analysts say the IMF is demanding some state-controlled economic reforms in Ethiopia, including floating the currency, to unlock funding.
Hit by a series of armed conflicts in recent years, the COVID pandemic and climate shocks, the country has about $28 billion in external debt and is grappling with very high inflation, around 20 percent, and a shortage of foreign currency reserves.
Under the shift to a market-based exchange rate regime, the NBE said “banks will henceforth be permitted to buy and sell foreign currencies from/to their clients and among themselves at freely negotiated exchange rates”.
The central bank, he said, would undertake “limited intervention to support markets in the early days and if warranted by disorderly market conditions”. (ns/lt)
