Addis Abeba — Ethiopia's recent decision to allow the Ethiopian birr (ETB) to float freely against the US dollar (USD) marks a significant shift in its economic strategy. As of August 3, 2024, this policy has led to a dramatic depreciation of the ETB and severe inflationary pressures.
The exchange rate of the USD has surged from approximately 57 ETB to between 91 and 100 ETB, reflecting a substantial depreciation of about 58%. This sharp decline has had immediate repercussions on the cost of living and market stability, raising serious concerns about the policy's effectiveness and its impact on the Ethiopian population. This analysis explores the implications of this policy and compares Ethiopia's experience with other countries that have implemented similar reforms, highlighting the critical challenges and lessons learned.
The Ethiopian government's shift to a free-market exchange rate has had profound economic consequences. The depreciation of the ETB has led to significant increases in the prices of essential goods and services. As of August 3, 2024, the cost of onions has risen from 40-50 ETB per kilogram to 70 ETB, cooking oil has increased from 1,100 ETB to 1,500 ETB for 5 liters, and the price of teff, a staple grain, has surged from 16,500 ETB to 19,000 ETB. Similarly, construction materials have also seen dramatic price hikes, with the cost of one quintal of cement climbing from 1,400 ETB to 2,000 ETB. The prices of vehicles have skyrocketed by hundreds of thousands of ETB due to rising import costs and fluctuating exchange rates. This rapid inflation has placed significant strain already on household budgets and created economic instability.
The implementation of this policy has been fraught with challenges. The government's response to inflation through price controls and business closures has been problematic. The closure of businesses due to price control measures might lead to job losses and reduced economic activity. Additionally, the disparity between official and black-market exchange rates has incentivized hoarding and black-market transactions. The black-market rate of 146 ETB per USD, compared to the official rate, highlights the policy's failure to stabilize the currency and manage inflation effectively.
The social impact of the policy has been severe. The sharp increase in prices for essential goods and services has led to widespread public discontent. The rising cost of living disproportionately affects low-income families, exacerbating socio-economic inequalities. Furthermore, the Ethiopian government's continued heavy spending on luxury spending and military operations amidst these economic challenges has been criticized. This perceived imbalance raises concerns about the government's commitment to addressing the economic needs of its population.
To better understand Ethiopia's experience, it is useful to compare it with other countries that have undergone similar economic reforms. Zimbabwe's experience in the late 2000s serves as a stark warning. The country faced hyperinflation and severe currency depreciation due to political instability and economic mismanagement. The introduction of a multi-currency system and later the reintroduction of the Zimbabwean dollar did not effectively address the root causes of economic instability, resulting in prolonged economic hardship. Ethiopia's current policy mirrors Zimbabwe's missteps, with similar risks of exacerbating inflation and economic instability.
Argentina's approach to currency reforms in the early 2000s provides another critical comparison. Argentina faced recurring currency crises and inflation issues, and the government's implementation of floating exchange rates and austerity measures led to significant inflation and social unrest. Ethiopia's policy faces analogous challenges, with the risk of inflating prices and social discontent without adequate mitigating measures.
Turkey's recent experience with currency volatility and inflationary pressures highlights the difficulties of managing economic stability amidst rapid currency fluctuations. The Turkish lira's substantial depreciation has led to increased living costs, and the government's responses, including interest rate hikes and market interventions, illustrate the complexity of stabilizing a volatile currency. Ethiopia's policy, by contrast, lacks such interventions, leaving it vulnerable to unchecked inflation and economic instability.
Ghana's introduction of the Ghanaian cedi in the early 2000s offers a contrasting approach. Ghana's managed float allowed for some market-driven adjustments while maintaining stability. This approach suggests that a more gradual implementation of currency reforms, combined with supportive economic measures, can mitigate the adverse effects of such reforms. Ethiopia's abrupt shift to a free-market policy, lacking a balanced approach, faces greater risks of inflation and economic instability.
Sign up for free AllAfrica Newsletters
Get the latest in African news delivered straight to your inbox
In conclusion, Ethiopia's macroeconomic policy shift, characterized by the liberalization of the exchange rate, has led to significant depreciation of the ETB and rising inflation. The immediate impacts reflect a broader challenge of balancing economic reform with stability. Comparative experiences from Zimbabwe, Argentina, Turkey, and Ghana highlight critical lessons and underscore the risks associated with poorly managed currency reforms. AS
Batseba Kassahun holds a Masters of Public Administration from New York University and a BA in Law and Justice with more than a decade of experience in public service. Focused on the plight of Tigray, she's dedicated to advocacy, research, and policy influence, bridging the gap between awareness and action. She can be reached at batsebak@gmail.com
