Ethiopia’s Floating Birr
Its Impact on Remittances
Ethiopia’s recent decision to float its currency, the Birr, marks a transformative moment in its economic landscape. This decision has significant implications for remittance flows, an essential lifeline for countless families. As the Birr depreciates sharply, the purchasing power of remittances is altered, impacting both senders and recipients amid rising inflation and economic challenges. EBR’s Eden Teshome explores the dynamics of these changes, the role of international financial institutions, and how the Ethiopian government’s reforms aim to stabilize the economy.
The National Bank of Ethiopia (NBE) made a bold economic move reverberating through Ethiopia’s financial landscape. On July 29, 2024, it introduced a floating exchange rate regime, a decisive action that led to an immediate sharp depreciation of the Birr. This marks a significant shift from the country’s long-standing managed exchange rate system and opens a new chapter in Ethiopia’s economic reform journey.
The transition to a market-based exchange rate system comes at a crucial time, coinciding with the International Monetary Fund’s (IMF) approval of a USD 3.4 billion Extended Credit Facility arrangement. This support package, complemented by the World Bank’s pledge of USD 16.6 billion over three years, signals international solid backing for Ethiopia’s economic reforms.
Prime Minister Abiy Ahmed, addressing parliament recently, highlighted early positive indicators following the currency float. “The National Bank’s foreign exchange reserves have grown by an impressive 161%, while banks’ reserves increased by 29%,” he reported. These improvements are accompanied by a 24% growth in remittances and significant foreign exchange activity, with banks purchasing USD 652 million and selling one billion dollars since the implementation of the new policy.
The impact on remittance flows, a crucial lifeline for many Ethiopian households, has been particularly noteworthy. Bamlak Fekadu, Head of Business Research and Development at Eaglelion Systems Technology, notes a significant shift in consumer behaviour. “Previously, clients preferred the parallel market due to the high exchange rates it offers. The high cost of sending money, which ranges between 6-10% in most systems, used to push senders to find alternative means with cheaper or no cost”. Now that EagleLion has introduced ‘CashGo’, which offers a competitive rate at just 1.5%, Ethiopian Diaspora communities have got a more affordable money transfer fee.” Bamlak explains. As a result, an influx of money senders have opted to use our system, with about two to three million dollar transfers made on some peak days. Bamlak explains how the figure peaked in mid-August, with nearly 30 million dollars transferred since then. CashGo is a mobile application that allows Ethiopians living abroad to send money to their families and friends back home quickly and easily. The app is available for download on both iOS and Android devices. Currently, the Bank of Abyssinia, Commercial Bank of Ethiopia, and Dashen Bank use the platform to send international remittances to Ethiopia. EagleLion also designed EthioDirect, another money transfer application for the Commercial Bank of Ethiopia.
With the policy change allowing the Birr to be traded based on its market value, the potential for increased Remittances is a beacon of hope. Last year, Ethiopia received six Billion dollars from Remittance, and the first quarter year performance in the current fiscal year stands at USD1.6 Billion, according to Fitsum Arega, Director General of the Ethiopian Diaspora Agency. If the current momentum remains the same, its annual gains from Remittance could surpass last year’s gains in a significant volume, ushering in a brighter economic future.
Ethiopia’s decision to float its currency was influenced by recommendations from international financial institutions, particularly the International Monetary Fund (IMF) and the World Bank. Following the introduction of the floating exchange rate, the IMF approved an Extended Credit Facility arrangement of about USD 3.4 billion, with an immediate disbursement of USD 1 billion. This support and the World Bank’s pledge of an additional USD 16.6 billion in funding over the next three years underscores the international community’s confidence in Ethiopia’s economic reforms.
The economic implications of this policy shift are complex and far-reaching. An agricultural and development economist, Shimelis Araya (PhD), provides insight into the dynamics: “When remittance inflows surpass outflows, the local currency tends to appreciate while the foreign currency depreciates. Both the IMF and the government have confirmed a rise in remittance inflows. However, despite this trend being observed for only about three months, other factors, such as limited export productivity, also contribute to the depreciation of the local currency.”
The export sector’s response to the currency float reveals opportunities and challenges. An anonymous exporter shares their experience: “The devaluation of the Birr has helped us recover some of our previous losses. While our profit margin remains unchanged, our income has risen by 20% due to the depreciation of the Birr.” However, they also note that supply-side speculation has created new challenges, with coffee prices rising significantly and forcing some contract delays and cancellations.
The banking sector has witnessed substantial changes in foreign currency flows, bringing reassurance. Abdisa Desalegn, Corporate Customer Manager at Cooperative Bank of Oromia, observes a positive shift: “Previously, individuals generating foreign currency often bypass banks, opting instead for parallel markets. Now, we are seeing these inflows directed toward banks, enabling us to better serve our clients due to increased foreign currency availability.” This shift is a positive sign for the banking sector and the economy as a whole.
For many Ethiopian households, remittances from family members abroad provide financial support that helps cover essential expenses such as food, education, and healthcare. The depreciation of the Birr means that while the nominal value of remittances may remain the same, their purchasing power is diminished. This scenario creates a challenging environment for families already facing economic pressures. According to Abdisa, ‘The shift to a floating exchange rate has posed challenges, especially for clients opening Letters of Credit. Letters of Credit are financial instruments used in international trade to ensure that payment will be received. If banks ensure fair service to businesses, particularly importers, it ultimately benefits the end consumer and the broader society.’
Consider the story of Amina Mohammed (Anonymous), a mother of three living in Addis Ababa. Amina’s husband works as a taxi driver, and they heavily rely on remittances sent by her brother, who has been living and working in the United States for the past five years. The economic challenges, primarily the depreciation of the Birr, have put a strain on their finances. Despite this, Amina and her family demonstrate remarkable resilience in adapting to the changing financial landscape.
Before the currency float, Amina received approximately USD 200 a month from her brother, which allowed her to cover basic expenses such as rent, utilities, and groceries. The remittance flow, a crucial lifeline for many Ethiopian households, has been significantly affected by the sharp depreciation of the Birr, leading to a diminished purchasing power for these remittances.
Amina has noticed that the prices of staple foods like injera, lentils, and cooking oil have surged. “Last month, I went to buy cooking oil, and the price had significantly increased. I couldn’t believe it. What used to cost ETB 900 now costs ETB 1,150,” she shares, her eyes reflecting the stress of managing her household on a tighter budget. This stark price increase indicates the numerous challenges many Ethiopian families face due to the currency floatation.
Amina has had to make difficult choices to cope with rising costs. “I’ve cut back on buying fresh vegetables and fruits. Instead, I go for what’s cheaper,” she says. Despite these adjustments, she worries about her children’s nutrition.
The remittance flow, which should have provided stability, could now be improved. “My brother is doing his best to support us, but with the exchange rates changing so rapidly, I’m not sure how long we can rely on that help,” Amina reflects, echoing the concerns of many Ethiopian families about the future of their financial support.
This personal experience symbolizes the broader struggle many families in Ethiopia face as they navigate the complexities of a rapidly changing economy. The government’s policies, while aimed at stabilizing the economy in the long run, have immediate consequences for everyday citizens like Amina, who are trying to adapt to new financial realities. Amina’s story resonates with many Ethiopians’ experiences, making the currency float’s impact more relatable to the audience.
The government’s comprehensive approach includes both incentives and regulatory measures. The proposed “Asset Recovery Bill” represents a significant deterrent to illegal financial activities, while the National Bank of Ethiopia’s introduction of ETB 100 billion funds supports diaspora loans. Dr Shimelis explains this dual approach as “fire and water provided for diasporas,” creating a framework that encourages official channel usage while discouraging parallel market activities.
Currency fluctuations, inflation, and international support will shape the economic realities for millions of Ethiopians. With the right policies and international backing, Ethiopia could harness the potential of its economic reforms to foster a brighter financial future for its citizens.
The impact on trade and commerce has been significant. An exporter who seeks anonymity notes that while export revenues have improved, import costs have sometimes doubled: “Goods that previously cost ETB 6 million now cost ETB 13 million.” This dramatic shift has led some businesses to exit the market due to uncertainty, while others are carefully managing their pricing strategies to maintain market stability.
The banking sector’s adaptation to these changes has been crucial. Abdisa highlights the improved ability to serve clients: “Concerns from traveler clients about foreign currency shortages are being addressed more effectively. Importers, who previously relied on deals with exporters to secure foreign currency, are now turning to us in greater numbers.”
Looking ahead, the success of Ethiopia’s currency float will depend on several factors. The government’s ability to maintain policy stability, manage inflation, and support key economic sectors will be crucial. As Dr Shimelis suggests, “The governments combined approach of incentives and strict regulations, along with attractive offers from financial institutions, is likely to shift senders’ behaviour toward legal channels that promise higher returns.”
The export sector’s recommendations for future success are transparent. The anonymous exporter emphasizes the need for policy stability and increased consultation with business representatives: “The economy requires policy stability from the government, as that is when most investment decisions are made. Policies should be thoroughly studied and discussed with business representatives before implementation.”
As Ethiopia navigates this significant economic transition, the interplay between currency policy, remittance flows, and financial stability continues to evolve. The success of these reforms will largely depend on the government’s ability to maintain a delicate balance between encouraging formal market participation and managing the inevitable challenges of economic transformation.
Prime Minister Ahmed reported that foreign direct investment grew by 6.4%, and commodity export revenue reached USD 1.5 billion in the year’s first quarter. These early indicators suggest positive momentum. However, the actual test of these reforms will be their long-term sustainability and ability to create lasting economic stability for Ethiopia’s people and businesses.
As Ethiopia navigates this significant economic transition, the interplay between currency policy, remittance flows, and financial stability continues to evolve. The success of these reforms will largely depend on the government’s ability to maintain a delicate balance between encouraging formal market participation and managing the inevitable challenges of economic transformation. The rising cost of living, driven by inflation and increased import expenses, poses a real threat to the financial well-being of many households.
It will be crucial to ensure that the currency float’s benefits are felt across all segments of society. As stakeholders adapt to this new economic landscape, the government should remain committed to policy stability and ongoing dialogue with business representatives. With foreign direct investment growing by 6.4% and commodity export revenue reaching USD 1.5 billion in the first quarter, early indicators suggest positive momentum.
Currency fluctuations, inflation, and international support will shape the economic realities for millions of Ethiopians. With the right policies and international backing, Ethiopia could harness the potential of its economic reforms to foster a brighter financial future for its citizens.EBR
13th Year • November 2024 • No. 135