Ethiopia has floated its currency to ease foreign currency shortages and attract foreign investment. According to reports, the move is part of the East African country’s efforts to secure over $10 billion in IMF and World Bank funding.
On its website, the National Bank of Ethiopia announced that banks can now buy and sell foreign currency at freely negotiated rates.
“The central bank will make “only limited interventions to support the market in its early days and if justified by disorderly market conditions.”
According to the Commercial Bank of Ethiopia, Africa’s second most populous nation has operated under a managed floating exchange rate system, leading to a shortage of dollars essential for imports and profit repatriation by foreign investors.
The Ethiopian birr plummeted by 30% against the U.S. dollar on Monday, July 29, 2024, as the currency fell from 57.48 birr per dollar on Friday, July 26, to 74.73 birr per dollar, Reuters reported
Internally, the East African country has been contending with increased financial difficulties arising from the effects of the COVID-19 pandemic and a two-year civil war that ended in November 2022.
In the wake of the economic crisis, the government has been implementing pro-market reforms to open up the economy and attract foreign investors. Among the economic reforms is the decision to float its currency to secure over $10 billion in IMF and World Bank funding.
According to Bloomberg, the government is currently negotiating with the IMF and World Bank to secure $10 billion in financing.
However, economic experts have expressed fears that the decision to float the birr could increase inflation, which is already at 20%.
According to some experts, higher inflation can reduce consumers’ purchasing power, leading to a higher cost of living and potential social unrest. The immediate impact on the cost of living can lead to public dissatisfaction and societal unrest if the issues are not carefully contained.
Furthermore, floating the birr can lead to increased volatility in the country’s exchange rate market, making it difficult for companies and investors to do business there. The initial volatility and uncertainty might deter some investors in the short term.
Source link : https://africa.businessinsider.com/local/markets/ethiopia-floats-currency-to-attract-investors-amidst-imf-talks/j73y0qv
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Publish date : 2024-07-29 11:31:39
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