Ethiopia’s Exchange Rate Reforms: From Dirty Peg to Managed Float

Addis Ababa

The Pre-Float Regime and Rationale for Reform

For decades Ethiopia maintained a dirty peg exchange-rate system. Under this regime the Ethiopian birr was effectively fixed or only slowly adjusted against the U.S. dollar, while strict controls governed all foreign exchange (FX) transactions. Commercial banks were subject to directives: 30% of all foreign-currency inflows had to be surrendered to the National Bank of Ethiopia (NBE), and allocation committees in banks met regularly to ration the remaining . Importers faced a complicated tiered system: requests were split into current account (basic necessities), essential, and non-essential categories. Each category was served via a long waiting list. Even “essential” imports might wait months; non-essentials were often deferred for 4–12 months or more. In effect, officially authorized FX sales did not clear the market: shortages were chronic and unwieldy.

To compensate, Ethiopia created export retention accounts (ERAs) to attract dollars. Exporters could keep up to 50% of their earnings in foreign-currency accounts (with 30% of those funds indefinitely retained) But these measures were no match for the gap between official and market rates. When FX was scarce, a large informal (“parallel”) market thrived. By late 2023 the official rate (about 57.5 ETB/USD) was far below what it cost on the black market (often 80–90 ETB/USD or more), leading to smuggling and surcharges. In short, Ethiopia’s FX system was overvalued and rigid: the birr was kept stronger than fundamentals warranted, contributing to large trade and current-account deficits. FX directives (the “Foreign Exchange Proclamation” rules) were revised repeatedly with little effect.

This distorted system had mixed impacts on inflation. On one hand, the overvalued peg kept import prices (in birr terms) artificially low and helped tame short-term inflation of tradables. On the other hand, it also meant scarce imports, pushing domestic costs up. A recap: real inflation was still very high (over 30% in 2022), but the peg masked some of the pressure. Official headline inflation peaked at around 30% in 2022 and was about 19–20% by mid-2024. Much of this was driven by war-related food shortages and government budget deficits financed by the central bank. In effect, the peg delayed a full devaluation-driven inflation surge, but it could not eliminate inflation. In fact, surveys and qualitative reports suggested hidden inflation – businesses stockpiling imports or hiking prices in anticipation of a devaluation – even as official data showed double-digit rates.

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Meanwhile, the parallel market price became a key barometer. For example, after the July 2024 float the official rate was set at 117 ETB/USD, but traders were already bidding ~140 ETB on the street.This persistent spread illustrated how the old system had built-up demand for dollars. (Under pressure from new reforms and IMF-linked funding, that gap later narrowed, as the NBE began biweekly FX auctions and banks released more FX). In summary, Ethiopia’s pre-July 2024 exchange policy was a tightly managed peg with tiered allocations – a dirty peg that had deepened FX shortages and a black market.

Inflation: Before vs. After the Float

Headline inflation trended downwards in the year before the float. By June 2024, annual inflation was about 19.9%, versus 29.3% a year earlier. Food inflation (fuelled by floods and conflict) was a larger component, while non-food inflation was somewhat lower. In early July 2024, just weeks before reform, the NBE announced a new monetary framework and raised its policy rate to 15% – in hopes of anchoring inflation below 20% by mid-2024 and under 10% by mid-2025. In practice, food prices were easing as the 2024 harvest came in; fuel and utilities were still largely subsidized, moderating price pressures.

After the currency float on July 29, 2024, many observers worried inflation would spike, as imported goods jumped in local-currency price. Indeed, immediate devaluation meant the birr was roughly 30% weaker against the dollar. However, inflation data showed only a mild uptick. By August–September 2024 headline inflation was about 17–18%.In fact, the IMF later reported that “inflation rates in July and August of 2024 were lower than expected” after the float, and that “there have been no indications of significant inflationary pressures”. Most consumer prices (especially staples) continued rising modestly, though there were anecdotes of sharp price increases for things like edible oil or fertilizer. Crucially, the government stepped in immediately: local authorities closed shops accused of unjustified price-gouging, and Addis Ababa’s city government moved to crack down on hoarding. The federal government also temporarily subsidized some essentials (fuel, fertilizers, medicine, edible oil) to blunt the short-term cost shock.

In short, inflation was actually a bit lower after the float than many predicted. Why? First, base effects: year-on-year comparisons eased as inflation had already been very high in mid-2023. Second, deliberate policy dampeners: immediate subsidies and supply interventions limited price jumps. And third, the NBE’s tighter monetary stance (high interest rates, liquidity management) put downward pressure. By late 2024 headline inflation was near 17%, and by early 2025 it had fallen further to the low teens.

Why Float the Birr in 2024?

Ethiopia did not float by choice, but out of necessity. Chronic FX shortages and an overvalued birr were strangling the economy. By mid-2024 foreign reserves were perilously low (about $1.4 billion, roughly one month of imports). Foreign debt was piling up – the country had defaulted on bonds in late 2023 – and multilateral lending was conditional on reform. Successive governments had delayed liberalization (citing war and humanitarian needs), but the post-conflict period created a “window of opportunity”. Reaching a deal with the International Monetary Fund (IMF) became a top priority: the IMF had indicated a strong preference for a market-determined rate. In practice the July 2024 float was priced in as part of a broader IMF/World Bank assistance package (~$10.7 billion total, including a $3.4 billion IMF Extended Credit Facility).

The formal announcements made this link clear. The NBE and Prime Minister publicly stated that a floating rate was needed to secure IMF support and resume debt restructuring. In a Reuters summary: “Ethiopia’s central bank floated the birr on Monday, a move it hopes will secure IMF support and enable progress on a long-delayed debt restructuring”. The U.S. Embassy also weighed in positively, noting that adopting market-based FX “is a difficult, but necessary step for Ethiopia to address macroeconomic distortions”. Practically, the system had become untenable: exporters were reluctant to repatriate earnings at the official rate; importers were stuck on queues or paying huge premiums on the black market. A de facto multiple-rate system was hurting growth and revenue. In short, the float was an IMF-backed shock therapy aimed at correcting long-standing imbalances.

Post-Float Challenges and Policy Response

Immediate Aftershocks: Devaluation and Rising Costs

The day after the float, the birr sharply depreciated – about 30% against the dollar. Almost immediately, importers and manufacturers faced higher costs. In the coming weeks, energy and commodity prices rose. For example, by early October the government raised petrol and diesel prices by roughly 10% (from ~82–83 ETB/liter to ~90–91 ETB/liter).Imported cooking oil and fertilizers briefly shot up too, as merchants tried to pass through the new rates. Urban consumers felt pinch from fuel, transport, and wage pressures (the government eventually allocated large funds for salary raises to offset hardship).

source: The Conversation

These effects were uneven. The war in Amhara and Tigray continued to strain budgets, and development aid remained constrained. Meanwhile, the depreciation exacerbated a trade deficit: imports became costlier and exports (often raw commodities) fetched lower birr prices. Foreign reserves took a short-term hit again as importers scrambled for dollars. Crucially, speculative and panic-driven activity spiked: currency traders tested the NBE’s resolve, and some banks reportedly bid excessively in early FX auctions. The parallel market premium momentarily widened again (black-market rates climbed above official by over 20%) before authorities’ interventions started to curb speculation.

Government Interventions

Recognizing the turbulence, Ethiopian authorities moved quickly on several fronts:

Biweekly FX Auctions: The NBE announced a regular auction system for selling foreign currency to banks (and through them to priority customers).The auctions aimed to transparently allocate FX at market-clearing rates. Though demand initially swamped supply, the NBE committed to maintaining the auctions “until the end of the fiscal year”. Within weeks, these auctions began narrowing the gap with the black market. In April 2025 the central bank reported that inflation in the parallel market was down to “single digits” over the official rate, thanks to rising FX supply and heavy approvals of FX transactions (e.g. $122.5 million approved by the Commercial Bank of Ethiopia in one instance).
Relaxing Surrender Rules: Almost immediately, the NBE abolished the export surrender requirement. Exporters could keep and sell foreign currency freely at market rates (only 30% of exports had to be used for imports under the old rule). Similarly, the strict import listing categories were rolled back: importers no longer needed a government license for most items (38 categories of restrictions were lifted)nbe.gov.et. These moves encouraged remittances and export earnings to flow into banks and then into auctions.
Price and Subsidy Measures: To soften the blow on consumers, the government temporarily subsidized some imports. The NBE Press Release explicitly noted that fuel, fertilisers, medicine, and edible oil would be subsidized for a transition period. In practice, the fuel price hike in October was delayed until some subsidies were exhausted. The federal budget was beefed up for safety nets: an extra 91.4 billion ETB was allocated for salary increases and social programs. Local governments closed shops accused of unjustified price gouging and ordered investigations into hoarding. The aim was to stop opportunistic traders from fueling inflation expectations.

The National Bank of Ethiopia H.Q

Tight Monetary Policy: The NBE pivoted fully to interest-rate policy. On July 9, 2024 it launched a new framework prioritizing price stability. A policy rate (the National Bank Rate) was set at 15%. The NBE began open-market operations: biweekly auctions of domestic treasury bills and new “overnight lending/deposit facilities” for banks. The point was to curb money growth, support the exchange rate, and signal commitment to low inflation. By mid-2025, the NBE reported it had tightened liquidity and achieved negative real interest rates turning positive – an important step to build credibility.
Crackdown on Parallel Markets: Law enforcement and regulatory agencies were mobilized. Business associations were warned against profiteering. In August 2024 two local governments (Addis Ababa and Oromiya) closed about 90 shops for spiking staple prices. The NBE publicly reprimanded commercial banks for submitting “artificially high bids” in FX auctions that distorted the rate. These actions signaled that speculative excess would not go unchecked. Over time, as FX supply increased (helped by diaspora and gold imports), authorities reported a marked decline in illegal forex activity.

Collectively, these steps stabilized some panic. Imports began to flow again: by mid-2025 the NBE noted that foreign exchange inflows had “increased threefold” compared to pre-float levels. Banks reported ample liquidity of dollars, reducing the premium. However, these measures also implied austerity: subsidies and spending cuts (especially as IMF conditions) meant domestic prices were rising for the first time in years. Many households and businesses struggled in the short run. Inflation targeting (explicit in the new NBE mandate) became a central goal, with NBE pledging to drive inflation below 10% in the next fiscal year. The authorities also agreed (as IMF urged) to eventually let fuel prices reach full-cost levels to rebuild fiscal buffers.

Ongoing Risks and Obstacles

Despite progress, Ethiopia faces several headwinds on the road to a healthy float regime:

Shallow FX Markets: Ethiopia’s financial markets are small. A few state-linked banks dominate, and private-sector credit is limited. This means FX auctions can clear only modest volumes at a time. The NBE itself admits it must “strengthen market efficiency” to deepen the forex market. Until more players participate, the official-parallel gap could re-emerge during shocks.
Low Reserves: Even after aid inflows, reserves remain low by international standards. (They jumped from ~$1.4 b in June 2024 to ~$3.6 b in Aug 2024, but that is only a few months of imports.) Sudden swings in capital flows could deplete them again. For now, official reserves rose thanks to the IMF and World Bank funds; but sustaining that cushion will require new exports, investments, or remittances.
Credibility and Communication: The NBE must build trust. Markets need confidence in the targets. The IMF has stressed reaching a positive real interest rate to shift inflation expectationsimf.org. It also cautioned against abruptly loosening credit or budget control before inflation is firmly below targetsimf.org. Any hint of policy reversal (e.g. re-subsidizing fuel or direct FX caps) could reignite the old distortions. Clear communication – on policy goals, timeline of reforms, and data transparency – is therefore essential.
Fiscal and Political Pressures: Cutting subsidies and raising rates come with political cost. Ethiopia’s economy still relies heavily on state spending (including for military and development projects). Balancing fiscal discipline with public discontent is delicate. So far, wage hikes and safety-net expansion have helped, but the underlying risk is that fiscal slippage (monetizing deficits) could trigger inflation again.
External Shocks: Ethiopia’s reform is happening amid regional instability and global uncertainty. A new conflict flare-up, a drought, or a spike in global commodity prices (fuel, food) could push prices up despite the float. The government must remain vigilant to cushion the poor (through targeted aid) without rolling back the core reforms.

Lessons from Other Countries

Ethiopia is not alone in liberalizing a pegged currency. History offers mixed lessons:

Successes: India (1991) and Mexico (1994–95) are often cited as success stories. India’s 1991 balance-of-payments crisis forced it to float the rupee and open the economy. Over the next decades, reforms unleashed rapid growth: by 2016 India was the world’s fastest-growing major economy. Inflation came down from the crisis highs to single digits. Mexico’s peso crash of 1994 also led to a painful recession, but with IMF support Mexico stabilized by 1996. Inflation (which spiked to ~50% in early 1995) fell below 10% by 1998 as confidence returned (though data details are beyond this scope). Both countries supplemented floats with strong policy adjustments and market liberalization.
Struggles: Conversely, Ghana and Nigeria show pitfalls in emerging markets. Ghana’s recent experience under an IMF program saw the currency slide ~40% in 2022, and by late 2022 inflation was above 50%Though Ghana eventually negotiated reforms, the transition imposed severe hardship and required repeated intervention. Nigeria attempted a similar move in mid-2023: all official FX windows were unified and the naira allowed to float. The result was a sharp depreciation and inflation surging to ~32% by early 2024imf.org (mostly food-driven). Nigeria’s case shows that, without sufficient reserves or credible fiscal tightening, a float can fuel immediate price surges. Argentina’s 2002 collapse (abandoning a one-to-one USD peg) likewise brought default and hyperinflation (peaking at ~40% per annum) before recovery years later. These examples suggest that a float must be paired with strong macro-stabilization to succeed.

In summary, emerging-market floats have often worked when governments stuck to austerity, opened up markets, and let the currency find equilibrium. They have floundered when reform was halfhearted or when reserves were exhausted. Ethiopia’s case seems to be following the successful pattern so far: it enshrined floating in law, moved quickly on fiscal and credit controls, and is in compliance with an IMF-backed program.

Policy Recommendations and Outlook

To consolidate the gains and ensure success, Ethiopia should pursue several key policies:

Maintain Market-Based Allocation: Continue the biweekly FX auctions and full liberalization of forex accounting. Discourage any return to discretionary allocations. Encourage foreign investment by further easing restrictions (the NBE has proposals for SEZs and diaspora accounts).
Build FX Reserves: Keep attracting reserves through IMF/World Bank support and by encouraging exports. Debt relief (through the G20 Common Framework) would also improve external sustainability. A moderate reserve buffer will dampen volatility and reassure markets.
Monetary Discipline: Hold the policy rate until inflation is visibly under control. As the IMF advises, aim for a positive real interest rate. The central bank should reinforce its independence and keep liquidity tight (avoid monetary financing of budget deficits). The new NBE law (prioritizing price stability) is a step in the right directionnbe.gov.et.
Gradual Price Reform: Continue subsidies for essentials only as a temporary bridge. Develop clear timelines to phase them out. For example, bring fuel and utility prices gradually towards full cost recovery (the IMF has specifically recommended removing fuel subsidies to rebuild buffers). This will raise government revenues and eliminate latent inflation, but must be accompanied by stronger safety nets for the poor.
Strengthen Safety Nets and Communication: Compensate vulnerable households through targeted transfers (e.g. PSNP expansions) so that inflation has less social impact. Keep the public informed about the reform path to manage expectations. Transparent publishing of data (inflation, FX transactions) will build credibility.
Develop Financial Markets: Deepen the domestic money and capital markets. This means implementing the planned open-market operations, extending maturities, and developing a repo market. A stronger money market will give the NBE more tools and anchor financial conditions.
Monitor and Enforce: Vigilantly enforce anti-hoarding rules. The early-shop-closures were a good signal; regulators should continue monitoring price movements and intervening if collusion occurs. Simultaneously, allow some pass-through: if costs rise legitimately, the market should adjust (conservative indices can help manage social effects).
Learn and Adapt: Keep studying comparable cases. The IMF and World Bank reviews (the first-review has already praised Ethiopia’s progress) should guide course corrections. If inflation or deficits re-accelerate, be ready to tighten or adjust – even if politically difficult.

Overall, Ethiopia’s reform appears to be on the right track. The economy has largely accepted the new regime: importers now buy dollars legally, and early panic has eased. The parallel market premium has shrunk to single digits. Inflation is trending downward (premised to reach ~10% by FY 2025/26). Reserves have started rebuilding. If policies remain prudent, Ethiopia can avoid the pitfalls seen in Nigeria or Ghana. The key will be steadfast implementation: avoiding premature subsidy rollbacks or policy reversals, while patiently tightening fiscal and monetary policy as needed. In that sense, it is a delicate balance – but one that Ethiopia has, for now, approached more decisively than many before it.

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