Ethiopia’s decision to float the birr marked one of the most ambitious economic reforms in the country’s modern history. Policymakers promised that a market-driven exchange rate would restore confidence, attract foreign investment, boost exports, and ease chronic foreign currency shortages. One year later, the reality looks far more complex. The Ethiopian birr continues to slide, and the interbank foreign exchange market shows signs of fragmentation, stress, and uneven participation.
The Float: High Hopes and Urgent Pressures
The government introduced the currency float to correct long-standing distortions. For years, Ethiopia maintained a tightly managed exchange rate that overvalued the birr. That system discouraged exports, encouraged imports, and pushed businesses toward the parallel market. Exporters struggled to compete globally, while importers faced delays and uncertainty when they sought dollars through official channels.
By allowing the birr to float, authorities aimed to align the official rate with market realities. They expected exporters to benefit from a weaker currency and foreign investors to gain confidence from transparent pricing. International lenders also welcomed the move, viewing it as a critical step toward macroeconomic stability and debt sustainability.
A Year Later: The Birr Keeps Falling
Despite these expectations, the birr continues to weaken against major currencies. Market demand for dollars remains strong, while supply remains limited. Import-heavy sectors such as fuel, machinery, pharmaceuticals, and food processing drive constant demand for foreign currency. Export earnings, although improving in some areas like coffee and oilseeds, fail to match import needs.
The ongoing depreciation reflects deeper structural issues. Ethiopia’s economy still relies heavily on imports, and foreign direct investment flows have not rebounded to pre-crisis levels. Debt servicing obligations also increase pressure on reserves. As the birr weakens, inflationary pressures intensify, reducing purchasing power for households and raising costs for businesses.
Interbank Market Fragmentation
The interbank forex market sits at the center of the reform. In theory, banks should trade foreign currency freely among themselves, using transparent rates that reflect supply and demand. In practice, the market operates unevenly.
Large state-owned and well-capitalized banks dominate most interbank transactions. Smaller private banks often struggle to access sufficient foreign currency and rely heavily on limited allocations from the central bank. This imbalance creates pricing disparities and reduces true market depth.
Some banks quote rates that differ significantly from others, reflecting varied access to exporters, remittance flows, and government-linked clients. As a result, the interbank market lacks the consistency needed to function as a reliable price-discovery mechanism.
Parallel Market Pressure Persists
The float aimed to eliminate the parallel market by narrowing the gap between official and unofficial rates. While the gap has narrowed compared to earlier years, the parallel market still operates actively. Businesses and individuals turn to informal channels when banks fail to meet their foreign currency needs promptly.
The persistence of the parallel market signals ongoing trust issues. Market participants want speed, predictability, and adequate supply. When the formal system fails to deliver, informal networks fill the gap, even at higher risk and cost.
Impact on Businesses
Manufacturers face mounting challenges. Rising import costs squeeze profit margins, especially for firms that sell primarily to the domestic market. Many companies struggle to plan production because exchange rate volatility makes cost forecasting difficult.
Export-oriented businesses experience mixed outcomes. A weaker birr increases local-currency revenues, but exporters still face logistical constraints, financing issues, and delays in accessing imported inputs. Without broader reforms in trade facilitation and infrastructure, currency depreciation alone cannot unlock export potential.
Small and medium-sized enterprises feel the pressure most acutely. Limited access to credit and foreign exchange restricts their ability to grow or even survive in a volatile environment.
Inflation and Social Effects
Currency weakness feeds directly into inflation. Imported goods become more expensive, and those costs pass quickly to consumers. Food prices rise as transportation and fertilizer costs increase. Urban households, which depend heavily on purchased food and imported goods, feel the strain sharply.
Wage growth fails to keep pace with price increases, eroding real incomes. This dynamic risks increasing social tension and undermining public support for economic reforms, even when policymakers view those reforms as necessary for long-term stability.
Central Bank Interventions
The National Bank of Ethiopia continues to intervene in the forex market, despite the float. Authorities sell foreign currency to priority sectors and essential importers to stabilize supply and limit extreme volatility. These interventions help manage short-term pressures but also complicate the floating regime.
Frequent intervention signals to the market that the exchange rate does not float freely. This perception can discourage participation and delay adjustment. At the same time, policymakers face a difficult balancing act. Sudden and sharp depreciation could trigger runaway inflation and financial instability.
Investor Confidence and External Relations
Foreign investors watch the birr’s performance closely. Persistent depreciation raises concerns about repatriation risks and return stability. Some investors delay new commitments until the forex market shows clearer signs of balance and predictability.
International partners, including multilateral lenders, continue to support Ethiopia’s reform path but emphasize the need for complementary measures. Fiscal discipline, debt restructuring, export diversification, and improved governance all play crucial roles in stabilizing the currency.
What Needs to Change
The experience of the past year shows that floating the birr alone cannot solve Ethiopia’s forex challenges. Authorities need to deepen the interbank market by ensuring equal access for all banks and improving transparency in pricing. Export promotion policies must move beyond rhetoric and address real bottlenecks, from logistics to financing.
The government also needs to rebuild foreign exchange reserves through a combination of export growth, remittance facilitation, and carefully managed external borrowing. Clear communication from policymakers can help anchor expectations and reduce speculative behavior.
The Road Ahead
Ethiopia’s currency float represents a bold and necessary step, but the journey remains unfinished. The birr’s continued slide and the fragmentation of the interbank forex market highlight the complexity of economic reform in a large, import-dependent economy.
If authorities strengthen institutions, support productive sectors, and maintain policy consistency, the birr can eventually find a more stable footing. Without these efforts, depreciation and market stress may continue, testing both the economy and public confidence. The next year will prove critical in determining whether the float delivers on its original promise or deepens existing challenges.
Also Read – Richard Dennis and the Turtle Traders
