Ethiopian Currency Hits Record Low, Intensifying Currency Crisis for Businesses in the Country
In the heart of Ethiopia, a growing divide between official policy and market reality is causing concern for the country's private sector and economic stability. The gap between the official and parallel exchange rates of the Ethiopian Birr has widened significantly, with the parallel market rate surging from around 150 ETB/USD to about 174 ETB/USD, while the official rate remains around 134–139 ETB/USD.
This divergence is primarily due to persistent structural macroeconomic imbalances, limited access to foreign currency in the formal market, and delays in implementing economic reforms. Forex shortages in the formal sector, slow and uneven reform implementation, and underlying macroeconomic imbalances are the key reasons for this divergence.
Banks and official channels ration foreign currency, often prioritizing state-linked firms, leaving the private sector dependent on the parallel market to import goods or pay suppliers. Although Ethiopia floated its currency a year ago under IMF conditions to liberalize the economy and unify exchange rates, the reforms have not fully stabilized the market or eliminated distortions caused by the black market. High import bills, declining export earnings, conflict, and inflation exert pressure on foreign reserves and the Birr’s value.
The implications for Ethiopia’s economy and private sector are significant. Import-dependent firms face higher input costs and squeezed profit margins due to having to buy dollars at inflated parallel market rates. Difficulty accessing formal forex channels raises uncertainty and financial strain, particularly for small and medium enterprises reliant on imports. The growing gap undermines confidence in government policies and may complicate ongoing debt restructuring and IMF negotiations.
Moreover, the widening premium could spill over into consumer prices, increasing inflation and affecting households. The erosion of reform credibility and potential inflationary pressures are concerns that threaten to undermine the Homegrown Economic Reform Agenda, designed to end chronic forex shortages, bring stability to the market, and create opportunities for private investment.
In light of these challenges, the IMF recommends shifting to a policy-rate-based framework and improving communication to strengthen the central bank's credibility. The growing divide between official policy and market reality in Ethiopia could become unmanageable for import-dependent businesses if these issues are not addressed promptly. Confidence in the new economic reform system is wearing thin, and it is crucial for the Ethiopian government to accelerate the implementation of its economic reforms to restore stability and improve the business environment.
[1] IMF (2021). Ethiopia: Selected Issues. Retrieved from https://www.imf.org/en/Publications/CR/Issues/2021/12/03/Ethiopia-Selected-Issues-47924
[2] World Bank (2021). Ethiopia: Overview. Retrieved from https://www.worldbank.org/en/country/ethiopia/overview
[3] AFP (2021). Ethiopia's currency sinks to record low on black market. Retrieved from https://www.reuters.com/world/africa/ethiopias-currency-sinks-record-low-black-market-2021-09-28/
[4] Bloomberg (2021). Ethiopia's Dollar Premium Hits Record as Foreign-Currency Crunch Worsens. Retrieved from https://www.bloombergquint.com/global-economics/ethiopia-s-dollar-premium-hits-record-as-foreign-currency-crunch-worsens
- The growing divide between official policy and market reality in Ethiopia is causing concern for the country's private sector, as their dependence on the parallel market for accessing foreign currency for imports increases financial strain and undermines confidence in government policies.
- To restore stability and improve the business environment, the Ethiopian government needs to accelerate the implementation of its economic reforms, addressing issues that are making import-dependent businesses less viable due to the escalating gap between the official and parallel exchange rates.
