Ethiopia announced a significant shift in its economic policy on Monday, easing long-standing foreign exchange restrictions as the country grapples with a severe economic crisis.
The move, implemented by the National Bank of Ethiopia (NBE), aims to introduce a more market-driven exchange rate for the local currency, the birr.
As a result of the reforms, the birr depreciated sharply against the US dollar, losing approximately 30 percent of its value.
The NBE justified the decision, stating that it would address long-standing distortions in the Ethiopian economy.
The East African nation has been seeking a substantial bailout package of around $10.5 billion from international lenders, including the International Monetary Fund (IMF).
However, negotiations for this crucial financial lifeline have been protracted and complex.
Analysts suggest that the IMF has been pressing for economic reforms, such as currency floatation, as a precondition for the bailout.
Ethiopia has been facing a perfect storm of challenges in recent years, including armed conflicts, the Covid-19 pandemic, and the impacts of climate change.
These factors have contributed to a mounting external debt of approximately $28 billion, coupled with soaring inflation and a critical shortage of foreign currency reserves.
Under the new regime, commercial banks will now have the freedom to buy and sell foreign currency at market-determined rates.
While the central bank will maintain a limited role in the market during the initial stages, its intervention will be restricted to instances of extreme market volatility.
