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Ethiopia's Birr Devaluation Sparks Economic Concerns Thursday 8 August 2024 Ethiopia's currency, the birr, has depreciated by 30% against the US dollar after the government eased currency controls, the Commercial Bank of Ethiopia reports. This significant policy shift aims to secure a $10.7 billion loan from the International Monetary Fund (IMF) and the World Bank by abandoning the fixed exchange rate system. Many Ethiopians are worried that this move will lead to a steep increase in the cost of living, especially with inflation already high. The country has been grappling with severe foreign currency shortages, a problem worsened by the recent two-year civil war in the Tigray region and ongoing conflicts in other areas, which have deterred foreign investment. The central bank has announced that the birr's value will now be determined by the market, reflecting the IMF's demands for economic reforms, including a floating currency, as part of the bailout conditions. The ongoing negotiations also focus on restructuring Ethiopia's external debt, which stands at around $28 billion. Mamo Mehretu, the central bank governor, stated on Monday that Ethiopia is implementing a market-driven foreign exchange system, marking the most significant policy change in fifty years. This new system allows commercial banks to set foreign currency prices through negotiation. Historically, devaluations of the birr have led to sharp price increases for food and other imported goods. To ease the transition and prevent economic instability, the government has pledged subsidies for essential goods like petrol and additional support for low-income workers. One of the driving factors for this policy change is the thriving parallel market, where the dollar was traded at twice the official rate due to the chronic foreign currency shortage. Importers often turned to this unofficial market, which has already driven up some costs. There are concerns that the birr's value might fall even further, potentially surpassing the parallel market rates.

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Ethiopia’s Birr Float Leaves Black Market Gasping for Cash Ethiopia's black market for foreign currency has been in turmoil following the government's decision to float the birr last week, leading to a sharp depreciation of the local currency. Traders operating in the parallel market say the birr has been highly volatile, with the dollar rate surging from 112 birr to 125 birr by the end of this week before declining again to 115 birr as dealers face challenges in obtaining sufficient cash. "The black market rate is really fluctuating as the cash shortage hits the dealers hard," said one currency trader in the capital Addis Ababa, who asked not to be named. "We are finding it increasingly difficult to access cash to buy hard currencies, leading to these wild swings." The cash shortage was initially triggered by previous gov't measures limiting bank lending growth, leaving informal dealers without sufficient liquidity to navigate the bedlam of the parallel market. According to renowned consultant and policy analyst Henok Assefa, banks are now calling their clients to offer letters of credit (LCs), but many are being turned down. "Banks are calling to offer LCs to their clients and they are being told 'No, you are too expensive'. Or 'Wait, let me speak to my other bank, and I will get back to you'," Assefa posted on X (formerly Twitter). Henok noted that Ethiopia is transitioning from a dollar scarcity to a birr scarcity, in a significant way. He suggested that the unthinkable may be about to happen - the official birr exchange rate may appreciate at the National Bank of Ethiopia (NBE) auction, which could even influence the black market rate lower. The floating of the birr is seen as a long-term solution for the foreign exchange crunch in Ethiopia, with the official exchange rate now significantly weaker than the previous tightly controlled regime. Experts say the currency float is a necessary reform, but the rapid and volatile depreciation of the birr is causing significant disruption in the short-term.

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ADDIS ABABA (Reuters) - Ethiopia has imported 14 million litres of cooking oil to ensure sufficient supplies of the basic commodity, its trade minister said, after the country's central bank floated the national currency last week to help secure international support. The Ethiopian birr slipped against the dollar last week after the National Bank of Ethiopia adopted a market-determined foreign exchange rate to secure a new International Monetary Fund (IMF) lending programme and to make progress on a long-delayed debt restructuring. It clinched an IMF deal worth $3.4 billion and funding from other creditors including the World Bank shortly after. On Monday, the birr was down 40% against the dollar to trade at 95.69 per greenback, the country's biggest lender Commercial Bank of Ethiopia said, while at some private banks one dollar was being traded for more than 100 birr. Traders in the capital Addis Ababa said the price of cooking oil had gone up by around 25% following the central bank's move. Kassahun Gofe, Ethiopia's minister for Trade and Regional Integration, said on Sunday that businesses which increase prices on basic goods would face temporary closure or see their licenses revoked. The ministry closed more than 2,000 stores for "unjustified price hikes and hoarding" after the new exchange rate policy was put in place, it said on Saturday.

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NBE Calls Urgent Meeting to Address Birr Crisis. The Governor of the National Bank of Ethiopia, NBE, Mamo Mehirtu, called an urgent meeting with leaders from commercial banks on July 29, 2024, regarding the recent economic reforms and birr devaluation. This indicates the importance and urgency of the changes being implemented. This urgent meeting called by NBE will address the escalating economic crisis, primarily focused on the rapid devaluation of the birr. Also on Monday, the Ethiopian government delegation and IMF team are due to meet to make an announcement about a bailout package. Ethiopia is expected to get around $10 billion from the financial institutions. The new economic changes will introduce several important steps. First, the government will implement a market-based foreign exchange system to help set a fair value for the country’s currency. The official birr exchange rate currently stands at 58.6 birr against the dollar, while in the black market the birr is trading at around 115 birr per dollar.

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