The birr’s sharp depreciation complements the government’s renewed drive to implement investor-friendly economic reforms
The National Bank of Ethiopia devalued the birr on Monday, July 29 following the switch from a rigidly managed regime to a flexible, market-determined rate. The currency fell 38% from 57.5 per USD on Friday, July 26, to 79.4 per USD at the official rate on Wednesday, July 31. The currency will continue to depreciate in the coming months, although significant day-to-day volatility is expected as a process of price discovery materializes. A large backlog in the demand for FOREX will drive the currency’s further depreciation through late 2024 but the rate will not immediately reach the parallel market rate of approximately 120 per USD. Assuming the government successfully secures up to USD 10 billion in loans and grants from the IMF and World Bank in the coming months, the currency is forecast to stabilize at approximately 100 per USD by the end of 2024, and average 115 per USD in 2025.
Business Implications
Firms will see an immediate improvement in the availability of FOREX, resulting in timelier payments from customers and local partners. The devaluation will not directly cause higher inflation because many companies have, for several years, relied on the weak parallel exchange rate to access foreign currency to pay for imports. Looking ahead, MNCs should plan for an upturn in customer sentiment in Ethiopia driven by improving FOREX access. However they should review their pricing strategies, for example by increasing the cadence of their pricing cycles until the birr stabilizes. Firms should also plan for an increase in competitive pressures as other companies consider reactivating growth and investment plans in Ethiopia that had been paused because of chronic FOREX shortages in recent years.
What has trigged the devaluation?
Currency reform is a prerequisite for the government to secure funding from the IMF and World Bank that will help stabilize public finances following the country’s December 2023 sovereign default. The devaluation also complements the government’s recent attempts to kick-start economic reforms that aim to attract FDI. These include new rules permitting foreign banks to open subsidiaries in Ethiopia, and allowing foreign companies to acquire minority stakes in Ethiopian lenders.
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