Birr plunges 15% as Ethiopia devalues currency

Move aims to tackle “severe” forex shortage

Addis Ababa
Addis Ababa
neiljs

The National Bank of Ethiopia (NBE) has devalued the birr amid a continued shortage of foreign currency in the east African nation.

The birr plunged some 15% against the US dollar overnight on October 11, and underwent similar movements against other major currencies, including the euro and sterling.

Central bank officials did not respond to requests for comment, but deputy governor Yohannes Ayalew told local media the move was designed to support the country’s struggling export sector. Low commodity prices have hampered some of Ethiopia’s main export markets, worsening the shortages of foreign exchange.

“Since investment return is high in Ethiopia, the devaluation won’t cause an inflationary pressure and adversely affect import,” said Ayalew, according to All Africa.

In a separate effort designed to ease what it describes as “severe” forex shortages, the NBE signed a currency swap agreement with Sudan on October 10. In a document announcing the deal, the central bank says it will “enable the countries to escape exposure to foreign exchange rate fluctuation risk and reduce the cost of borrowing foreign currency”.

The Ethiopian birr has been allowed to gradually devalue against the US dollar for several years, possibly in a reflection of the sizeable inflation differential relative to the US. The last major devaluation was made in 2010.

Despite the foreign exchange challenges, Ethiopia’s economy is expanding rapidly. The country has maintained real GDP growth rates of around 10% since 2004, though the rate slipped a little in recent years. A report by the International Monetary Fund, published in September, found the economy to have shown “strong resilience”, despite the export problems and a drought.

“Medium-term growth prospects are favourable, supported by strong private investment, completion of key supporting infrastructure projects, and rising productivity as export-oriented industries take root,” mission chief Julio Escolano said on September 26.

The IMF team urged the central bank to tighten monetary policy to “complement” the “appropriately tight” fiscal stance. It also said the NBE should permit a more flexible exchange rate, which would support competitiveness.

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