By Dylan GAMBA
In a modest clothing boutique located in the capital of Ethiopia, Medanit Woldegebriel has witnessed a near doubling of her dress prices over the last two months, resulting in a significant decline in customer traffic.
“Sales have decreased considerably,” acknowledges a despondent Woldegebriel, whose establishment is situated within the extensive Merkato market of Addis Ababa, where she sources garments from Turkey and the United Arab Emirates. On July 30, Ethiopia made the difficult choice to allow its currency to float freely against the dollar, leading to an immediate depreciation of the birr by one-third.
The depreciation of the birr has persisted, with the current exchange rate standing at 112 birr for one dollar, a significant increase from the previous rate of 55 birr prior to the adjustment. This shift reflects ongoing economic challenges faced by the nation.
The government found itself in a precarious position, as its export revenues, primarily derived from flowers, tea, and coffee, amounted to only $11 billion last year. In stark contrast, the cost of imports, which include essential items such as food, machinery, and fuel, reached a staggering $23 billion, creating a substantial trade imbalance.
Leading up to the currency reform, Ethiopia’s foreign reserves were alarmingly low, sufficient to cover merely two weeks’ worth of imports. International investors had long contended that maintaining a fixed exchange rate for the birr against the dollar was not viable. Consequently, the International Monetary Fund withheld a $3.4 billion aid package, along with a $1.5 billion financing plan from the World Bank, until Ethiopia acknowledged the necessity of liberalizing its currency. Unfortunately, this economic transition has been particularly challenging for ordinary Ethiopians, a significant portion of whom live below the poverty line of $2.15 per day.
A shopper in Merkato, after purchasing several tomatoes and school books for his children, remarked that prices have increased by one-third overall.
Abrish, a civil servant who requested anonymity due to apprehensions about government criticism, mentioned that his relatives living overseas are able to send foreign currency to assist them.
He expressed that their survival would be impossible without this financial support.
The nation, with a population of 120 million, was already grappling with significant inflation, which reached a peak of 30 percent in 2022. This situation was exacerbated by the combined effects of the Covid-19 pandemic, the conflict in Ukraine, a severe drought, and its own destructive conflict in the Tigray region.
Tewodros Makonnen Gebrewolde, an economist affiliated with the International Growth Center (IGC), acknowledges that “the remedy is difficult to accept in the short term.”
However, he asserts that it is the only viable solution.
The proposed reforms aim to enhance the competitiveness of exports and will introduce new regulations that will allow a broader range of businesses to access dollars, which were previously allocated solely to essential strategic sectors.
The previous limitations resulted in numerous businesses functioning significantly below their full potential due to their inability to import essential raw materials and equipment.
“The authorities have assured improved access to foreign currency for enterprises, enabling them to enhance their productivity and consequently increase their output,” stated Gebrewolde.
Prime Minister Abiy Ahmed has described the reforms as “essential for alleviating shortages of foreign currency, eliminating barriers to private sector investment, and fostering growth.”
Bridging the disparity between the official dollar exchange rate and the black market rate—which was approximately double prior to the reforms—should also assist in diminishing smuggling activities, thereby redirecting more trade into legitimate channels, according to Gebrewolde.
However, after enduring years of economic challenges and escalating prices, consumers like Abrish have become disillusioned.
“I do not anticipate any improvement in the situation,” he remarked.
There were alternatives that were not considered. Ethiopia could have used it BRICS membership that was granted on the first of January 2024.