Addis Abeba — The National Bank of Ethiopia (NBE) announced today a shift to a market-based exchange regime as part of a major revision of the country's foreign exchange (FX) system. The move follows the government's announcement yesterday regarding Ethiopia's macro-economic reform program.
According to the NBE, banks are now permitted to buy and sell foreign currencies from and to their clients and among themselves at freely negotiated rates. The central bank stated it will make only limited interventions to support the market in its early days and if justified by disorderly market conditions.
In the wake of the announcement, there was a noticeable slide in the foreign exchange rate. As of today, the Commercial Bank of Ethiopia reported a buying rate of 74 and a selling rate of 76 birr per 1 USD, showing a 30% depreciation within a day.
The American Embassy in Addis Abeba commented on the shift today, stating, "Implementing a market-based foreign exchange system is a tough but essential move for addressing Ethiopia's macroeconomic issues."
The Embassy further urged, "We encourage the government to work with development partners to implement these reforms, which will support the Ethiopian people and advance towards a more open and robust economy."
The NBE indicated that this reform is part of a broader package of economic measures aimed at addressing macroeconomic challenges and stimulating private sector activity. The central bank noted that the previous system, while intended to maintain stability, had led to the emergence of a parallel market and contributed to high inflation.
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Key elements of the reform include the elimination of surrender requirements to the NBE, the removal of import restrictions on certain product categories, and improved retention rules for exporters. The NBE also announced the introduction of non-bank foreign exchange bureaus and the simplification of rules governing foreign currency accounts.
To mitigate potential negative impacts, the government plans to implement temporary subsidies on essential imports such as fuel, fertilizers, medicine, and edible oil. The NBE also indicated that additional measures include financial support for civil servants and an expansion of the Productive Safety Net Program to address inflation impacts.
The reform is supported by a reported $10.7 billion financial package from Ethiopia's external partners, including the IMF and World Bank. The NBE described this as a significant commitment of support for Ethiopia's economic reforms.
The central bank projects that these changes could lead to improvements in various economic indicators over the next four years, including economic growth, inflation reduction, and increases in exports and foreign direct investment. However, the NBE noted that these projections are based on the successful implementation of the policy package.
