Ethiopia's recent move to a market-based foreign exchange rate system is proving to be a significant positive development for export-oriented investors and the nation's broader macroeconomy. The reform, implemented as part of a comprehensive macroeconomic overhaul, aims to address long-standing currency distortions and enhance economic competitiveness.
Investors are already experiencing tangible benefits. Harsh Kothari, an Indian investor in Ethiopia, highlighted the improved access to foreign exchange. "Previously, we had to wait for a long time to get foreign exchange, but now there is no queue," Kothari told EBC Addis Ken. He also noted increased competition among banks, allowing investors to secure more favorable exchange rates. Furthermore, banks are now proactively reaching out to investors, a significant shift in service delivery. "Previously it was us who would go to the banks and request to submit our proforma, but now the banks themselves come to our office. So I see big changes in the market economics and particularly in service from the banks. This is a big change. We encourage this to continue," he added.
Economist Hussein Ali echoed the sentiment, emphasizing the multilevel benefits of the reform, particularly for the external sector's competitiveness. He described the reform as a necessary measure. Hussein explained that while Ethiopia has seen economic growth over the past 15 years, it hasn't been consistently sustainable due to government-led investment funded by borrowing. He characterized the pre-reform economy as a "highly air-filled balloon" vulnerable to bursting under additional pressure.
According to Hussein, a key driver for the market-based exchange rate was the need to improve external market competitiveness and boost export gains to facilitate external debt payment and restructuring. He believes the reform will contribute to a consistently positive import-export balance in the long run.
Early indicators following the reform's implementation in July 2024 have been promising. The country's foreign exchange reserves have reportedly increased, and the current account balance, though not yet consistently positive, has shown periods of surplus.
However, Hussein cautioned that while the exchange rate reform is a crucial step in narrowing the balance of payment deficit, it is not a solitary solution. A range of additional improvement initiatives are required to significantly advance external sector competitiveness.
The Ethiopian government has acknowledged the potential for short-term economic shocks from the reform and stated it is implementing measures to mitigate the impact on ordinary citizens, including salary increments. The full-scale macroeconomic reform implementation commenced in July 2024 and is expected to bring further changes to the national economy.