By Yared Seyoum
- Market-based FX rate regime is hoped to relieve FX shortages, remove constraints to private investment and growth, align import/export prices with reality, and address balance of payments imbalances.
Ethiopia is in the final hours of preparing for a landmark transition that will see its currency adopt a flexible exchange rate regime, a move officials say is needed for macroeconomic stability.
Officials believe an overvalued birr had distorted the economy for years by fueling inflation and hampering private investment. The goal of moving to a flexible exchange rate is to ease chronic forex shortages, better align import and export prices, and tackle persistent current account deficits.
The shift is part of Homegrown Economic Reform Agenda 2.0's plan to modernize monetary policy, strengthen public finances, and expand development funding through 2026.
Low-income workers will receive wage subsidies as fuel and living costs rise during the transition, according to a policy statement from Prime Minister Abiy Ahmed’s office. The government will also partially offset fuel price hikes through subsidies to contain inflation risks.
The IMF and World Bank have pledged billions in support tied to successful macroeconomic overhauls. Allowing the birr to float against foreign currencies is seen as key to stabilizing prices, attracting investment, and securing infrastructure funds.
The IMF executive board meets next week to formally review a new program for Ethiopia as it seeks fresh multilateral cash to address economic challenges.
Ethiopia is in line to receive $10.5 billion over coming years if negotiations with lenders are successful, Prime Minister Abiy said this month. The funds would finance reforms and development initiatives.
Addis Ababa says it will also implement governance and anti-corruption measures after completing macroeconomic reforms, with regular updates from finance and central banks.
"Additional details regarding the reform will be regularly disclosed by the Ministry of Finance and the National Bank," the new policy statement reads.
