Many Ethiopians have been struggling to make ends meet recently. In late July, the government’s acceptance of an International Monetary Fund (IMF) loan brought significant economic reforms. Learn more about how these reforms will impact everyday life and the broader concerns they raise about global power dynamics.
Historical Context and Currency Situation
Ethiopia’s currency, the Birr, has historically been fixed by the national bank, maintaining relative strength and stability among other local African currencies. In 2019, when the current government came into power, the Birr was valued at around 30 Birr (ETB) to 1 US Dollar (USD). By the end of July 2024, after several adjustments following the COVID-19 pandemic, inflation, and a cost-of-living crisis, the Birr had depreciated to 57 ETB to 1 USD. However, on the black market dollars were exchanged for twice the official rate, over 110–118 ETB to 1 USD – this was due to a chronic foreign currency shortage.
Import Taxes and Manufacturing
The import tax is high, and Ethiopia imports a high proportion of daily consumables due to limited manufacturing capability. A conflict that lasted for two years in Tigray was resolved through an African Union-led mediation in Pretoria, South Africa. However, conflicts are still ongoing in parts of the Amhara and Oromia regions, leading to reduced export capacity and deterring foreign investment.
Most of Ethiopia’s exports were agricultural: coffee, oil seeds, vegetables, flowers etc. The civil war has destroyed farms and displaced farmers, so not much farming activity has been able to take place.
In 2023, Ethiopia’s trade deficit amounted to around 14.27 billion USD. This in turn has caused a chronic foreign currency deficit, which reached its worst point recently. In response to this, the government has identified which imports consume a large portion of foreign currency.
Cost of Living for Ethiopians
The cost-of-living crisis is hitting people hard. Many have been extremely stressed that they are no longer able to make ends meet whilst working full-time, particularly public employees like teachers, nurses, and doctors. House rent and food commodities have seen large price increases recently.
Fuel, a cross-cutting commodity which affects the price of all other commodities, has historically received government subsidies. Over recent years many of these have been gradually removed. As of the end of July 2024, the price stood at about 80ETB, 1.4USD per liter. The government has stated that it is not intending to increase the price immediately in response to the reforms described below.
IMF and World Bank-Backed Reforms
On Sunday 28th July 2024, Ethiopia secured a $10 billion loan (reported by African Business) from the IMF, contingent on significant economic reforms:
- Stopping the national bank’s control of the exchange rate; moving away from a decade-long fixed exchange rate system to a market-based, floating foreign exchange rate.
- Removing subsidies on several commodities, including fuel.
- Privatizing state-owned facilities, partially or fully, including Ethio Telecom, Ethiopian Airlines and other service providing elements.
- Allowing foreign banks to operate in Ethiopia and encourage foreign investment through policy.
- Devaluing the Birr to narrow the gap between the official and black market rates.
Immediate Impact of Reforms
The Birr devalued sharply to around 112–114 ETB to 1 USD by Wednesday 7th August 2024 — 100% devaluation in just 10 days. However, in a recent interview the National Bank governor has hinted at potential government intervention if this trend continues. While the official rate now aligns closely with the pre-reform black market rate, some estimate with uncertainty that the black market rate has now risen to around 140 ETB to 1 USD – it is a concern that we cannot be sure when the gap between the two rates is closing as this would indicate when devaluation may slow.
This devaluation, combined with high import consumption, will cause inflation to rise. While tradespeople are yet to experience the effects of this, the market price of their stock has already begun to soar – some have pre-emptively increased their prices. The government has banned this practice of increasing prices of goods bought on the previous exchange rate, which sounds like a reasonable action while they have also revoked trade licenses of many shops and kiosks. Traders have begun hoarding supplies because they know they will be able to sell them for a higher price soon.
There is a big fear that inflation could get much worse soon. This inflation will severely impact many people, especially those who are low paid, such as government workers and those working in the informal sectors. Fuel prices have nearly doubled in Birr terms.
And of course, the Birr value of Ethiopia’s global debt has drastically increased, prompting the government to review the annual budget which the parliament endorsed in June this year, increasing it by over ETB 500 billion.
Critical Analysis
The recent economic reforms in Ethiopia, particularly the devaluation of the Birr, have sparked significant concern and debate. Over recent years, countries who have reformed their macroeconomic policies to meet conditions set by IMF and WB loans and debt restructures were seen going through extreme devaluations, inflations, instability and turmoil. Non-politically aligned, credible Ethiopian economists and experts warned the government that these reforms could exacerbate inflation and make life impossible for even the average citizen, particularly given the ongoing internal conflicts. These reforms have a clear political edge, the IMF have seen the historical impacts of these policies, yet they continue to create these conditions for their loans to countries in the global south.
The US wields significant control over IMF loans and their terms, with its government officials actively negotiating terms for Ethiopia’s recent loan. Unlike the US, which can manage debt by adjusting monetary policy or printing dollars if and when needed, Ethiopia must repay loans with dollars earned from the export of hard-earned tangible goods like coffee or gold—this becomes more challenging as their currency depreciates. The USD’s dominance in global transactions gives the US a major advantage, enabling cheap borrowing and flexible economic management. This dynamic reflects the larger global financial system, heavily influenced by powerful economies like the US. It’s clear that reforms are needed to create a fairer and more balanced global economic landscape.
Experts have questioned whether the government, ‘will be committed to using this money toward interventions that could alleviate problems that the country and its people are swamped with?’, and asked ‘do they have the priorities of the people in mind?’ Given past spending patterns, there are concerns that the funds may not be used in the public’s best interest. However, the severity of the situation — like unpaid public servants in some provinces — makes it crucial that this money benefits those struggling the most, especially considering the harm the loan has already caused.
Impact on HPA USA Programs in Ethiopia
At a micro level, we are facing rising operational costs due to fuel price increases and the devaluation of the Birr. This means we’ll need to keep a closer eye on project budgets to avoid overspending and to make sure we’re directing resources where they’ll have the most impact. We may also need to scale back operations, reconsider our plans, or seek additional funding from donors to ease the financial pressure and keep our programs on track.
At a macro level, the worsening economic situation is likely to hit public health hard and deepen poverty. Inflation is likely to make basic necessities like oil and grains unaffordable for many. Although the government has proposed salary increases for low paid workers, these benefits are still pending and may only help those on minimum wage. Meanwhile, the broader poor and middle-class populations continue to struggle, without adequate relief in sight.
