Dark
Light
Today: May 28, 2024

Ethiopia must make a difficult choice regarding devaluation in order to secure an IMF bailout.

April 11, 2024
3 mins read

By Rachel Savage and Dawit Endeshaw|Reuters

Ethiopia is facing a critical decision regarding a potential significant devaluation of its currency in order to secure a rescue loan from the International Monetary Fund (IMF). Unfortunately, the recent visit by the IMF to the country concluded without reaching an agreement with the authorities, making the need for a decision even more urgent. This comes at a challenging time for Ethiopia, as it is already grappling with high inflation and became the third African nation to default on its debt in December. Since 2020, Ethiopia has not received any funds from the IMF, and its previous lending arrangement with the organization derailed in 2021. In late 2022, the federal government and a rebellious regional authority managed to sign a deal, bringing an end to a two-year civil war.

During its most recent visit, the IMF acknowledged the progress made but did not explicitly state that currency reform is a prerequisite for its support. However, it is worth noting that the IMF generally supports flexible exchange rates determined by the market. Last year, sources informed Reuters that Ethiopia had requested $3.5 billion in assistance from the IMF. The country’s persistent foreign currency shortages and strict control over the exchange rate have created an environment conducive to the growth of a black market. Currently, the birr is traded at a rate of approximately 117 to 120 per dollar on the black market, which is more than double the official rate of around 56.7.

It appears that the Ethiopian government is facing challenges in meeting the requirements set by the IMF,” mentioned Abdulmenan Mohammed, a British-based economic analyst from Ethiopia. “The Ethiopian officials are concerned about the potential devaluation of the birr, which could lead to significant adverse economic consequences such as high inflation rates and an increase in foreign currency debts when converted into birr.”

The civil war initially caused a delay in the progress of Ethiopia’s request for debt restructuring under the G20’s Common Framework, which was established in response to the COVID-19 pandemic to include newer creditor countries such as China and India.

The nation’s foreign debt stood at $28.2 billion as of the conclusion of March, as per official records.

By August 2023, a moratorium on debt payments was obtained from the primary bilateral lender, China, which had pledged $14 billion to the country from 2006 to 2022, as reported by Boston University’s Chinese Loans to Africa Database.

The rest of Ethiopia’s bilateral creditors followed suit in December, but said they could cancel the relief if Ethiopia did not get an IMF deal by March 31. When the deadline lapsed, it was extended to June 30.

There are widely varying estimates of the size of currency devaluation the IMF would accept, that could pave the way for a deal.
Irmgard Erasmus of research firm Oxford Economics said that she expects a weakening of 15% to coincide with an IMF staff-level deal on a bailout loan, a prerequisite for its external debt restructuring moving forwards.
“We retain the view that the IMF will require a good faith measure that solidifies Ethiopia’s intent to implement a more flexible FX (foreign exchange) regime,” she said in a note to clients. “(This) will set the scene for a series of stepwise devaluations on the path to FX liberalisation and monetary policy reform.”
More than one currency adjustment is likely, the first between 30-50%, said Connor Vasey, a consultant at J.S. Held, pointing to Egypt, which devalued its pound 38% and secured a larger IMF loan in March.
The Ethiopians probably prefer a more gradual devaluation but have a weak negotiating position, Vasey said, after a previous IMF loan programme expired in 2021, amid the conflict and concerns about the country’s ability to pay its debts.
“Ethiopia is coming into the meeting room with the IMF that is playing hardball and saying, ‘You don’t really have a foot to stand on, in terms of negotiating down our position,'” he said.
Nonetheless, Vasey said he expected Ethiopia to secure an IMF deal soon.
“There’s an international push to get this all lined up. It’s just a question of sequencing of the reforms,” he said.
An IMF spokesperson pointed to comments made earlier this month by spokesperson Julie Kozack, who responded to direct questions on why Ethiopia did not secure a loan during the visit and whether it is likely to get one at the Fund’s Spring Meetings next week in Washington DC.
“The team made substantial progress,” she said. “These discussions are continuing and will continue at the upcoming Spring Meetings.”
Ethiopian government officials did not respond to requests for comment. Authorities are committed to FX reform, state finance minister Eyob Tekalign told Reuters in October 2022.
“The exchange rate unification remains one important policy goal,” he said at that time. “But we are just doing it gradually.”

1 Comment

  1. By looking at other nations that disintegrated from IMF-devaluation induced economic collapse, I recommend that IMF wait a little bit more until things in Ethiopia become even more precarious to force the devaluation so the disintegration that the West seeks could be effected with the loudest bang and irreversibly. Life in Ethiopia right now is hell. Currency devaluation will clearly make it intolerable. With all the fuel from ethnic-based massacres, hate speech and freezing of economic activities due to the lack of peace and security, you drop this currency devaluation on top of it and Baaaaam! Still, I suggest that IMF and the gang wait a little bit more for a more perfect implosion.
    Of course, I am being sarcastic.

Leave a Reply

Your email address will not be published.

The hypocrisy of individuals who advocate for non-violence in their profession is apparent.
Previous Story

The hypocrisy of individuals who advocate for non-violence in their profession is apparent.

The Ethiopian Student Movement: A Rejoinder to Bahru Zewde’s The Quest for Socialist Utopia
Next Story

The Ethiopian Student Movement: A Rejoinder to Bahru Zewde’s The Quest for Socialist Utopia

Latest from Blog

Go toTop