In a dramatic departure from its longstanding economic policies, the National Bank of Ethiopia (NBE) has introduced sweeping reforms to its foreign exchange regime. The move, aimed at stimulating growth and attracting foreign investment, is expected to have far-reaching implications for the country’s economy.
Starting today, commercial banks are granted the authority to freely negotiate foreign currency exchange rates with clients and among themselves. This marks a significant shift from the previously centralized system. Additionally, exporters are now allowed to retain 50% of their foreign exchange earnings, a substantial increase from the previous 40%. The NBE has also abolished the waiting list system for banks’ forex allocation, easing access for importers.
According to Bloomberg and Financial Times, floating the exchange rate also targeted securing more than USD 10 billion in funding from the IMF and World Bank and restructuring debt after defaulting in December.
To further liberalize the economy, the central bank has lifted restrictions on 38 product categories and permitted the establishment of non-bank foreign exchange bureaus. Moreover, Ethiopians can now open foreign currency accounts based on their forex income, and the interest rate cap on foreign loans to private entities has been removed.
These reforms are part of a broader strategy to reduce the NBE’s market interventions and promote a more market-oriented economy. As Governor Mamo Mehiretu stated, the goal is to boost Ethiopia’s competitiveness, unlock export potential, and attract foreign direct investment.
However, the immediate impact of these changes has been a sharp depreciation of the Birr. To reflect the new market-based system, the Commercial Bank of Ethiopia, the country’s largest lender, immediately increased the price of the US dollar by 17 birr indicating a devaluation of about 30 percent from Friday’s official rate of about 57 Birr. Similar changes occurred for the British Pound and Euro.
While the NBE has pledged to bolster the country’s foreign exchange reserves, concerns about short-term instability and inflationary pressures are mounting.
Source: NBE, Addis Fortune, Bloomberg, Financial Times
