Ethiopia: Risk and Reward After IMF Approves $3.4 Billion Program

[Deeq A.]

Ethiopia’s decision this week to break with three decades of managing its currency has won it billions of dollars of funding from the International Monetary Fund and other creditors.

It may come at a price — at least initially — for the more than 100 million people who live in Africa’s second-most populous nation. 

A man counts Ethiopian birr banknotes in Addis Ababa, the capital. Photographer: Amanuel Sileshi/Bloomberg

Nigeria partially relaxed controls on the naira last year and Egypt did the same with its pound in March, paving the way for it to secure $8 billion of IMF funding. Both countries have since had to contend with rocketing prices and simmering civil unrest. 

The potential fallout of a weaker currency is “particularly concerning for Ethiopia, where inflation is already high,” said Bilal Bassiouni, head of Middle East and North Africa forecasting for Pangea-Risk. “The situation parallels Nigeria’s recent experience, where devaluation caused substantial inflation and social unrest due to escalating costs of essential goods.”

Still, Ethiopian Prime Minister Abiy Ahmed had little choice. 

The currency peg, like in Nigeria, had resulted in a critical shortage of foreign exchange, limiting imports of fuel and medicine and preventing businesses from repatriating profits, which resulted in some of them leaving. 

It also stoked a large gap between official and parallel market rates.

The expected funding (Abiy is ultimately hoping for more than $10 billion) includes $3.4 billion over four years from the IMF. That be welcomed by business and investors, and may help it recover from a debt default. 

But with inflation already at almost 20%, hard times lie ahead for the country’s citizens.

Abiy will be banking on temporary subsidies on essential imports and financial support for government workers to keep a lid on their unhappiness. — Fasika Tadesse and Antony Sguazzin

Source: Bloomberg 

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