Amid Ethiopia’s shift to market-based foreign currency exchange, the Ethiopian Birr (ETB) has sharply depreciated, exacerbating inflation and straining households and businesses alike. According to the Ethiopian Economics Association’s (EEA) latest Quarterly Macroeconomic Update (Vol. 9, No. 4), the floating exchange rate, coupled with inflationary pressure and policy realignments, has introduced new dynamics into Ethiopia’s fragile economy. The report covers developments from mid-September to December 2024, shedding light on the exchange rate volatility and inflationary trends following the reforms.

Between mid-September and December 2024, the ETB lost 11.5% of its value against the US dollar, reaching 127.92 ETB/USD by the end of the year. This depreciation has fueled inflation, with food prices seeing substantial increases. These developments underscore the difficulties Ethiopia faces as it navigates economic reforms aimed at stabilizing the country’s fiscal landscape.

In July 2024, Ethiopia transitioned to a market-driven exchange rate regime, a move that has led to significant volatility in the currency market. From mid-September to December 2024, the ETB/USD rate climbed from 114.72 to 127.92, reflecting both market adjustments and structural challenges within the economy. While the gap between the official and parallel exchange rates narrowed from 65 ETB to 14 ETB, the parallel market premium remains, signaling persistent foreign exchange shortages.

A critical development in the currency market was the November 2024 abolition of the Franco Valuta system. This system, which previously allowed for import financing through informal channels, was phased out in a bid to stabilize the foreign exchange market. Initially, the move reduced volatility, but it eventually led to increased speculative pressures as market participants adjusted to the new system.

Further complicating matters, the exchange rates offered by different banks varied significantly, with private banks like Tsehay Bank offering higher rates than state-owned institutions such as the Commercial Bank of Ethiopia (CBE). This variation in exchange rates added to the confusion and volatility in the forex market, exacerbating the challenges faced by businesses and consumers alike.

Inflation has emerged as a pressing concern for Ethiopia, with food prices contributing significantly to the overall rise in the cost of living. In September 2024, food inflation surged, particularly for vegetables and oils, driven by disruptions in the supply chain, particularly in the Amhara region, where ongoing conflicts affected the availability of essential goods. These disruptions led to a 5.59% rise in vegetable prices for the month. The volatility in food prices reflects broader economic pressures, including rising import costs due to the weakening of the ETB.

In addition to food inflation, non-food prices also saw significant increases. Education costs rose by 11.58%, restaurants and hotels increased by 8.72%, and transport costs increased by 6.79%, largely due to the higher fuel prices resulting from the currency depreciation. These increases have further strained household budgets, as basic necessities become more expensive.

Regional disparities in inflation also highlight the uneven nature of the economic challenges. While some regions, like Benishangul-Gumuz, recorded headline inflation rates as high as 31%, others, such as Harari, saw lower rates, with inflation at 17.2%. These disparities reflect varying regional supply chain conditions and market dynamics, further complicating efforts to address inflation nationwide.

The report also outlines several key strategies to stabilize Ethiopia’s economy. It emphasizes enhancing foreign exchange market stability by narrowing the gap between official and parallel exchange rates through increased transparency, reducing administrative controls, and encouraging export promotion, remittances, and foreign direct investment. To address inflation, the focus should be on improving supply chain efficiencies, particularly in transport, logistics, and warehousing, as well as bolstering domestic production and addressing regional inflation variations. 

It also suggests stabilizing inflation linked to exchange rate depreciation through a well-managed floating exchange rate policy and strengthening foreign exchange reserves. Furthermore, structural reforms should prioritize reducing import dependency by promoting local industrialization, improving agricultural productivity, and diversifying exports. Lastly, the report calls for an integrated policy framework to coordinate monetary, fiscal, and structural policies, ensuring long-term stability and boosting investor confidence.