Ethiopia Shifts to Market-Based Forex Regime

Ethiopia's National Bank has shifted to a market-based foreign exchange regime, allowing commercial banks to freely negotiate exchange rates and hold onto a larger portion of foreign earnings, marking a significant departure from previous restrictions. This reform is part of efforts to secure $10.7 billion in external financing from the IMF and World Bank, aimed at addressing chronic foreign currency shortages and high inflation. Prime Minister Abiy Ahmed's administration is framing these changes as necessary for economic growth, despite concerns that they could lead to a significant devaluation of the Ethiopian birr. The reforms also include removing ceilings on interest rates for foreign loans and simplifying rules for foreign currency accounts for residents. Analysts suggest that these measures are linked to ongoing negotiations for a new IMF lending program, which had stalled due to conflicts in the Tigray region. The government maintains that these changes are part of a 'homegrown' economic strategy, despite external pressures from international financial institutions.