At a small fashion store in the Ethiopian capital, Medanit Woldegebriel’s dresses have nearly doubled in price over the past two months, driving customers away.
“Business is slow,” admits a disheartened Woldegebriel, whose shop in Addis Ababa’s vast Merkato market imports clothes from Turkey and the United Arab Emirates.
On July 30, Ethiopia made the painful decision to let its currency float against the dollar, and the birr lost a third of its value overnight.
The decline has continued since then — it now takes 112 birr to buy $1, compared with 55 birr before the switch.
The government had little choice. Its exports (mainly flowers, tea and coffee) brought in just $11 billion last year, compared to imports (food, machinery and fuel) that cost $23 billion.
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On the eve of the currency reform, Ethiopia had only enough dollars to pay for two weeks of imports.
International investors had long argued that the birr’s peg to the dollar was unsustainable.
A $3.4 billion aid program from the IMF and a $1.5 billion financing plan from the World Bank are on hold until Ethiopia accepts the inevitable and frees the currency.
But for ordinary Ethiopians, a third of whom live below the poverty line of $2.15 a day, the impact has been harsh.
Buying some tomatoes and some textbooks for his children, a shopper at the Mercato said prices rose by a third overall.
“We have family living abroad who can send us foreign currency,” said Abris, a civil servant whose name was changed because of concerns about criticizing the government.
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“Without it we could not survive.”
“Hard to swallow”
The country of 120 million was already suffering from high inflation – peaking at 30 percent in 2022 – due to the combined effects of the Covid-19 pandemic, the war in Ukraine, a severe drought and its own devastating conflict in the Tigray region.
Tewodros Makonnen Gebrewolde, an economist at the International Development Center (IGC), admits that “it’s a tough pill to swallow in the short term.”
But he says it was the only option.
The reforms will make exports more competitive and include new rules that will give more businesses access to dollars previously earmarked for key strategic sectors.
The old restrictions meant that many businesses operated well below their full capacity because they could not import raw materials and machinery.
“The authorities have promised better access to foreign currency for companies, which will allow them to increase their productivity and thus be able to produce more,” Gebrewolde said.
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Prime Minister Abiy Ahmed called the reforms “critical to easing (foreign exchange) shortages, lifting restrictions on investment and growing the private sector.”
Closing the gap between the dollar’s official and black market rate — which was nearly double before the reform — should also undermine smugglers, bringing more trade into official channels, Gebrewolde said.
But after years of financial problems and rising prices, buyers like Abrish have lost faith.
“I don’t see the situation improving,” he said.
Source: AFP