Ethiopian Prime Minister Abiy Ahmed has openly criticized the nation’s banks for maintaining an exchange rate for the Ethiopian birr that is significantly stronger than what is observed in the parallel market. This comes in the wake of Ethiopia’s decision to remove its currency peg to the U.S. dollar, a move intended to align the official exchange rate more closely with the rates seen in street markets. The de-pegging has led to a notable depreciation of the birr, impacting the country’s economic landscape.
The devaluation of the birr was initiated on Monday, resulting in an immediate 23% drop in its value against the dollar, bringing the official rate to 74.74 birr per dollar. By Thursday, the currency had further depreciated, trading at about 80 birr per dollar. However, this official rate remains significantly lower than the rate offered by street traders, which has surged from 113 birr per dollar to 118 birr per dollar within a few days. This disparity between the official and parallel market rates highlights the challenges the Ethiopian economy faces in achieving a stable and realistic exchange rate.
One of the major financial institutions, Dashen Bank, has responded to these changes by devaluing the birr by 41% since Monday. This substantial adjustment reflects the bank’s effort to align its rates with the market realities and the broader economic strategies pursued by the government. The Prime Minister’s frustration stems from the perception that banks are not acting swiftly or adequately to address the significant gap between the official and parallel market rates, which can undermine economic stability and investor confidence.
The Ethiopian government’s decision to de-peg the currency is part of a broader strategy to address economic imbalances and improve the competitiveness of Ethiopian exports. By allowing the birr to find its natural market level, the government aims to reduce the reliance on foreign exchange reserves and curb the black market for currency trading. However, this transition has been fraught with challenges, including inflationary pressures and the need to manage public expectations and economic stability.
Abiy’s criticism of the banks highlights the tension between government policy and financial institutions’ practices. While the government pushes for more rapid alignment with market rates, banks are cautious, considering the potential economic repercussions of a sudden and sharp devaluation. The banks’ reluctance to fully embrace the market rates can be attributed to concerns over inflation, the purchasing power of the birr, and the overall impact on the economy.
For the Ethiopian public and businesses, the fluctuating exchange rates add a layer of uncertainty. Importers and exporters are particularly affected as they navigate the changing costs of goods and services. The public’s confidence in the birr and the financial system’s stability is crucial for maintaining economic stability during this period of adjustment.
The international community and investors are closely watching these developments. Ethiopia’s economic reforms, including the de-pegging of the birr, are seen as critical steps toward liberalizing the economy and attracting foreign investment. However, the success of these reforms depends on the government’s ability to manage the transition smoothly and maintain macroeconomic stability.
In conclusion, Prime Minister Abiy Ahmed’s criticism of Ethiopian banks over their handling of the birr’s exchange rate underscores the complexities and challenges of economic reform in Ethiopia. As the country navigates the devaluation and seeks to align its currency with market realities, the balance between government policy, financial institution practices, and market forces will be crucial in determining the success of these efforts. The coming months will be critical as Ethiopia works to stabilize its currency, manage inflation, and build a more resilient and competitive economy.
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