ETHIOPIA finds itself at a critical juncture as it weighs the necessity of a major currency devaluation to unlock crucial funding from the IMF. With recent IMF talks yielding no agreement, the country faces increasing pressure to address economic vulnerabilities and secure vital financial support.
The East African nation, plagued by high inflation and fiscal instability, defaulted on its debt in December, becoming the third African state in as many years to do so. Despite ongoing challenges, Ethiopia’s efforts to secure IMF assistance have encountered obstacles, leaving its financial future uncertain.
While Ethiopia has not received IMF funds since 2020, its last lending arrangement with the institution faltered in 2021. A tentative peace deal signed in late 2022 to end a protracted civil war offered hope for economic recovery but has yet to translate into tangible progress.
Although the IMF has acknowledged some progress during its recent visit, discussions have stalled over the necessity of currency reform. Abdulmenan Mohammed, an Ethiopian economic analyst, remarked, ‘It seems that the Ethiopian authorities have found accepting the demands of the IMF hard… The Ethiopian authorities are worried about devaluation of the birr, (which) would have serious negative economic repercussions.’
Ethiopia’s chronic foreign currency shortages and tightly controlled exchange rate have fuelled a thriving black market, with the birr trading at significantly higher rates than the official value. Economic analysts warn of the potential consequences of currency devaluation, including rampant inflation and escalating foreign currency-denominated debts.
Amidst ongoing negotiations, Ethiopia faces mounting pressure from creditors and international stakeholders to address its economic challenges. David Kurtz, director of research & analysis for mining and energy at GlobalData, noted, ‘Namibia is only a very minor copper producer in Africa… and there are only a few projects with the potential to add to its output by the end of the decade.’
Despite the hurdles, analysts anticipate Ethiopia will ultimately secure an IMF deal, albeit with compromises. Irmgard Erasmus of research firm Oxford Economics remarked, ‘We retain the view that the IMF will require a good faith measure that solidifies Ethiopia’s intent to implement a more flexible FX (foreign exchange) regime.’
While Ethiopia’s negotiating position may be weak, there remains optimism that a resolution will be reached. As discussions continue, the international community watches closely, recognising the urgency of Ethiopia’s economic challenges and the significance of potential IMF intervention.