Ethiopia central bank releases $175m to forestall forex crisis

Ethiopia central bank releases $175m to forestall forex crisis

By JAMES ANYANZWA

The National Bank of Ethiopia (NBE) has released $175 million into the economy to forestall a foreign currency crisis linked to fuel-related payments falling due in the coming months, and which could erode the economic dividend arising from the International Monetary Fund (IMF)-backed financial sector reforms.

The banking regulator said in a statement on October 3 that the funds would help cover the foreign exchange needs of the Ethiopian Petroleum Supply Enterprise (EPSE), the primary importer of fuel and fuel products in Ethiopia.

The fuel-related import payments that were contracted before the forex rate reforms included the liberalisation of the forex market starting July 2024.

“Ethiopia’s foreign exchange reform has shown a very positive start in just a short period of two months, with a significant drop in the parallel market premium (from near 100 percent to below five percent) and a strong supply response seen in exports and remittances,” NBE Governor Mamo Mihretu said.

“FX reserves at NBE and at commercial banks have also risen to record levels in recent weeks. Today’s sale of $175 million by NBE is part of a comprehensive plan that addresses all fuel-related FX payments for this year while also ensuring improved foreign exchange access and availability for all other economic sectors.”

Ethiopia is fighting macroeconomic headwinds associated with severe inflation, mounting debt and foreign currency shortage, which is impacting foreign investments in Africa’s second-most populous country.

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Read: Ethiopia faces tough devaluation decision to secure IMF bailout

According to the NBE, the injection of more dollars in the foreign exchange market would help the energy utility firm to settle its oil import bill without destabilising other sectors of the economy, and further interventions will be implemented if need be.

“In line with the new foreign exchange regime, NBE may also conduct periodic auctions to provide foreign exchange funds to banks should this be needed to address disorderly market conditions,” Mr Mamo said.

Prime Minister Abiy Ahmed is working to open up the economy to foreign investments after decades of State control. Several foreign companies and financial institutions such as Kenya’s Equity and KCB banks are eyeing the market.

Kenya’s telco Safaricom has already settled in the country after the liberalisation of the telecommunications sector.

The NBE started implementing a flexible exchange rate regime policy backed by IMF in late July as part of new measures to stabilise the economy.

Under the new regime, commercial banks can, for the first time, set prices for foreign exchange, while non-bank entities can operate forex bureaus after decades of a fixed exchange rate regime, where the government set prices for foreign currencies.

The Abiy administration had been facing mounting pressure from the World Bank and the IMF to float the country’s currency and implement critical reforms in the foreign exchange market, as a requirement for freeing more than $10 billion in fresh funding.

On December 20, 2019, the IMF board approved three-year arrangements under the Extended Credit Facility and the Extended Fund Facility for Ethiopia amounting to about $2.9 billion to help the country implement their “Homegrown Economic Reform Plan” to maintain macroeconomic stability and improve living standards.

Read: Ethiopia seeking $2bn under IMF programme, sources say

But the programme was abandoned due to conflict in the northern region of Tigray, and the negotiations resumed after a November 2022 peace deal.

Last year, Ethiopia defaulted on the interest (coupon) payment amounting to $33 million on its Eurobond in the wake of a financial crisis triggered by the Covid-19 pandemic and the two-year civil war that ended in November 2022, joining Zambia and Ghana, which had also defaulted on their external financial obligations.

Ethiopia’s public debt stood at $65.82 billion as at March 31, 2024, according to data from the country’s Ministry of Finance, with external debt rising 0.5 percent to $28.38 billion, from $28.24 billion on June 30, 2023.

Source link : https://www.theeastafrican.co.ke/tea/business/ethiopia-central-bank-releases-175m-to-forestall-forex-crisis-4786640

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Publish date : 2024-10-05 06:10:21

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