For the past half-century, Ethiopia tightly controlled the official value of its currency, the birr. That changed in July, when unmanageable debts and dwindling foreign reserves forced the government in Addis Ababa to liberalize the exchange rate regime. The decision, which followed similar moves by Egypt and Nigeria, allowed the Horn of Africa nation to clinch $3.4 billion from the International Monetary Fund and a further $16.6 billion from the World Bank. It also opened the door to talks with creditors on restructuring at least half of its $28.9 billion in external debt.
The government borrowed heavily during more than a decade of low interest rates to finance ambitious infrastructure projects that were expected to boost economic growth, but the investments drained its coffers. Wasteful public spending, shocks from the pandemic, a two-year civil war in the northern Tigray region, territorial conflicts, prolonged droughts and flooding all exacerbated the problem. Ethiopia’s heavy debt burden and dearth of foreign currency caught up with it in December, when it defaulted on a bond payment. In July, left with just enough foreign reserves to cover two weeks of imports, it enacted painful measures, including floating the birr to secure an IMF program that would enable it to renegotiate its debt under the Common Framework — a pandemic-era program to help poorer countries rework their loans. It also overhauled its monetary policy, using interest rates rather than controls on private credit to try to contain inflation.
