Addis Abeba — Prime Minister Abiy Ahmed, on Thursday, stated the need to narrow the gap between the black market and official exchange rates following the recent macroeconomic reforms supported by the International Monetary Fund (IMF) and World Bank (WB).
"I don't believe the exchange rate policy currently followed by the banks ensures proper [currency] unification. We need to reduce the gap between the black market and the official exchange rate. What difference does it make if the black market rate is 130 and the official rate is 70? This needs to be addressed," the PM asserted.
"We need a strategy that reduces the black market rate. The efforts so far are insufficient," he said, indicating the need for further depreciation of the birr to close the gap between the official and parallel markets.
Subsequently, on Friday, the local currency, birr, plummeted to a buying rate of 90.7 per USD and a selling rate of 98.05 per USD, effectively depreciating by about 40% since the announcement of the new forex reform earlier this week.
PM Abiy clarified that the macro-economic reform policy is part of Ethiopia's long standing economic liberalization and was not a new decision.
"I am often surprised by the reactions of Ethiopian intellectuals. The IMF has been working with Ethiopia since the time of Emperor Haile Selassie, through the Derg regime, and the EPRDF, which implemented structural adjustment programs, including a 58% devaluation," he explained, adding that his government did not devalue the currency but rather implemented currency unification.
"We did not devalue the currency, that claim is false. What we did was currency unification," PM Abiy Ahmed stated, stressing how the widening gap between the official and the parallel market impacted the economy. "Even banks were operating in the black market. Everything except fertilizer and fuel imports is affected by the black market," he noted.
The PM described the reforms as a necessary step for the country's economy. "This decision is like a bitter pill--it's tough to swallow, but it's necessary to heal from our economic pain," Abiy stated.
He acknowledged the significant investment and infrastructure gaps Ethiopia faces. He noted the heavy burden of debt from projects like the Ethio-Djibouti railway and the Addis Ababa light rail system.
"With a $4.9 billion debt, it's difficult to see an easy way out," he said, explaining that the bond market default was a strategic move to push for debt restructuring, a complex process that required extensive negotiations.
Foreign exchange issues were a major point of discussion. Abiy pointed out the substantial gap between demand and supply, particularly in the export sector.
The reforms, introduced by the National Bank of Ethiopia (NBE), shifted Ethiopia to a floating exchange rate regime, allowing banks to buy and sell foreign currencies at freely negotiated rates.
The PM addressed concerns over potential inflation following the staggering depreciation of the birr. "Will some people be hurt by inflation? Yes. But this isn't about striking gold or birr; it's about making tough choices with significant benefits," he admitted.
"This wasn't a decision made lightly," he asserted, adding that "It's one of the most significant decisions, second only to integrating peripheral national groups into the central government."
To combat exploitation and theft following the forex reform, Abiy announced the establishment of a task force. "A task force has been prepared for this, and there will be high-level oversight with necessary actions taken," he said, emphasizing the importance of strong enforcement.
The Prime Minister highlighted the government's commitment to supporting vulnerable populations through targeted subsidies and salary adjustments.
"We adopted an approach where the lowest-paid employees, earning 1,500 birr, received a 300% raise--something unprecedented in Ethiopia's history," he stated. Abiy also mentioned ongoing fertilizer subsidies for farmers to ensure sufficient agricultural production, despite the high costs.
Addressing the impact of fuel costs on various sectors, Abiy noted the government's efforts to subsidize fuel. "The government spends around 100 billion birr on fuel subsidies. Despite the additional costs, our fuel prices are lower compared to surrounding countries," he explained. "We won't make changes that harm the poor."
The PM also Addressed concerns about the potential misuse of recent credit funds, and reassured the public about the government's intentions regarding military expenditures.
"Some people are concerned that the government might use the funds to purchase UAVs. My message to them is that we are preparing to sell UAVs, so help us find markets where we can sell them during this reform era. That's our focus now; it's not like before," he said.
"Instead of misplaced worries, send remittances legally, pay taxes properly, and export goods on time by working diligently. If the government acts responsibly, the bitter pill we're taking now will be a healing medicine. It may be bitter, but it will lead to long-term health," he asserted.
The Prime Minister also addressed the banking sector, advocating for consolidation. "Thirty-seven banks in Ethiopia are too many because they are not functioning as true banks. They need to consolidate into five or six larger, more capable banks that are governed by business laws rather than ethnicity or local interests," he argued.
Sign up for free AllAfrica Newsletters
Get the latest in African news delivered straight to your inbox
In his speech, Abiy called for collective efforts to ensure the success of the reforms. "The success or failure of these reforms lies in our hands--we decide," he stated, urging farmers, exporters, and the government to work together. "Income must increase, exports must increase, and production must increase. If this doesn't happen, the reform will be at risk."
Abiy concluded by highlighting the need for public cooperation and vigilance against greedy traders. "If they raise prices inappropriately, it will greatly hinder our efforts and cause undue harm to the people," he warned.
"Contrabandists may try to create noise by buying influence on platforms like YouTube, but they won't stop us. They can't. While we support the poor, we will also encourage contrabandistas to transition to legal practices," he remarked.
He called for the public and the government to come together to tackle these challenges and ensure a decade of consistent economic growth.
The Prime Minister also stated the need to ensure peace and stability the success of the monetary reform policy, adding that his government is holding a series of talks with the armed groups operating in the Amhara and Oromia regions.
