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Ethiopia has secured a $3.4 billion loan from the International Monetary Fund (IMF) after implementing a significant economic reform by floating its currency. This move is aimed at addressing the country’s persistent foreign currency shortages and enhancing its appeal to foreign investors.
The IMF announced that the four-year financing package will support Ethiopia’s Homegrown Economic Reform (HGER) Agenda. The funds are intended to address macroeconomic imbalances, restore external debt sustainability, and create a foundation for sustained, inclusive, and private sector-led growth.
Historically, the National Bank of Ethiopia had maintained a managed foreign exchange (FX) rate system, which led to chronic shortages of US dollars impacting importers and foreign investors seeking to repatriate profits. On Monday, the Ethiopian birr depreciated by 30% to 74.73 per dollar following the central bank’s decision to lift FX market restrictions and commit to only “limited interventions” in the market.
The IMF’s loan comes with specific conditions, including the implementation of an interest-based monetary policy to control inflation and fiscal reforms aimed at improving government revenue collections.
This approval marks the culmination of extensive negotiations between Prime Minister Abiy Ahmed’s administration and international financial institutions. Ethiopia is seeking over $10 billion from the IMF and World Bank to manage its escalating debt, including a $33 million international bond payment defaulted on in December 2023.
The Ethiopian economy faces challenges from high inflation and growing debt obligations, with over $28 billion in external debt reported as of December 2023. The proposed lending programme, which was first introduced in 2019, has experienced delays due to armed conflicts in the Tigray region and slow economic reforms. The US, IMF, and World Bank had previously withdrawn their support during the conflict, exacerbating the economic strain already compounded by the COVID-19 pandemic.
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