As a country, Ethiopia marches to the beat of a different drum in quite a number of issues. Historically, the country was never colonised, a fact that shaped its development in various ways, both economically and politically. 

Economically, the country is in the process of transitioning to a market economy through the liberalisation and privatisation of many of its publicly owned companies. For many years it held on to the control of foreign exchange markets but earlier this week it relinquished that control in exchange for funding from the IMF. What led to this point?

The National Bank of Ethiopia (NBE) issued the  Foreign Exchange Directive (FXD/01/2024) on monday which is part of the country’s Home-Grown Economic Reform Plan (HGER 2.0). The directive made 11 significant policy changes that reduced the NBEs role in the sale and buying of foreign exchange. The earlier system allowed for the growth of a parallel market and inflation undermining legitimate business. 

The news led to the fall of the birr by up to 30% against the dollar but the IMF approved a US$3.4 billion Extended Credit Facility (ECF) for 4 years with an immediate disbursement of about a third of this figure. The ECF is normally disbursed to Low Income countries for the medium term to assist them in tackling balance of payment problems. The ECF is supposed to assist Ethiopia achieve its Homegrown Economic Reform (HGER) Agenda by addressing external debt sustainability, grow its private sector led growth and attract more external financing. 

Ethiopia defaulted on its debt recently with Fitch downgrading its debt status to CC status. It is estimated that the country owes $7.7 billion to foreign governments, with the majority owed to China. It also has $5.2 billion in debt to private creditors, including $3.2 billion to commercial banks. It requested the G-20, which includes China, to restructure part of its debt under the G-20’s Common Framework, which coordinates debt relief with both public and private lenders. Last year, it announced that China had agreed to suspend payments on debt due in a year. However, due to the lack of transparency surrounding Ethiopia’s loans from China, the exact size of these payments and the plans after the suspension ends in July 2024 remain unclear. 

Ethiopia faces significant challenges to Covid-19 and the war in Tigray which has depleted its foreign currency reserves. This is why the loan from the IMF was important accompanied by the restructuring announced by the NBE. If it sticks to the path outlined in its plan, the country may yet recover and regain its balance.