Ethiopia has experienced significant economic expansion in recent years with a GDP growth rate of approximately 7.2 percent in the fiscal years 2020 to 2023 – a testament to Ethiopia's emergence as one of the world's fastest growing economies in today's global landscape. That being said, currently, Ethiopia is facing an economic downturn that has led to the country’s decision to float its currency. This critical move was influenced by an array of ongoing economic challenges such as limited foreign exchange reserves, rampant inflation rates and a growing disparity between official and black market currency exchange rates. Ethiopia’s long held fixed exchange rate became less viable as its economy deteriorated.  

The country is now implementing structural reforms with the support of the IMF and other global financial bodies, which have long encouraged Ethiopia to adopt a more flexible exchange rate system, arguing that it would enhance the competitiveness of the currency and potentially increase exports. Ethiopia was initially reluctant, as a floating currency could lead to higher inflation; the depreciation of the Birr makes imported goods, which are essential for fulfilling domestic demand, more costly. This has resulted in public discontent, particularly considering Ethiopia's high inflation rate, averaging around 30% in recent years. With Ethiopia embracing a new floating exchange rate regime in July, the Birr’s value is now determined by market forces. While this approach offers more flexibility, it also brings uncertainty, especially for businesses dependent on imports. 

On a brighter note, the newly adopted floating currency could make Ethiopia more appealing to foreign investors. With the currency's value set by market forces, exports could become more competitive on the international stage. This is particularly important for Ethiopia's goals to industrialize and attract more investment in manufacturing.



References:

“Ethiopia Overview.” World Bank, World Bank Group, 9 Apr. 2024, www.worldbank.org/en/country/ethiopia/overview. 

Girma, Kaleab. “Ethiopia Secures Currency Swap Agreement with China.” Shega, Shega | Media, Data & Intelligence, 5 Sept. 2024, shega.co/news/ethiopia-secures-currency-swap-agreement-with-china. 

“IMF Reaches Staff-Level Agreement on the First Review of the Extended Credit Facility for Ethiopia.” IMF, International Monetary Fund, 27 Sept. 2024, 

Sandner, Philipp. “Ethiopia Becomes BRICS Member amid Economic Crisis – DW – 01/16/2024.” Dw.Com, Deutsche Welle, 17 Jan. 2024, www.dw.com/en/ethiopia-becomes-brics-member-amid-economic-crisis/a-68000253. 

www.imf.org/en/News/Articles/2024/09/27/pr-24348-ethiopia-imf-reaches-agreement-on-the-first-review-of-the-extended-credit-facility#:~:text=Implementation%20of%20Ethiopia%27s%20homegrown%20economic,disruption%20to%20the%20broader%20economy.