Last week marked one year since the consequential decision to float the Birr as part of the government’s IMF-backed macroeconomic reforms. Over the past 12 months, the federal government and regulators at the National Bank of Ethiopia (NBE) have implemented a series of measures all aimed at fixing macroeconomic imbalances, improving export revenues, cutting down import bills, closing the gap between official and parallel forex market rates, and easing access to foreign currency.
The results have been mixed, as have opinions about the reforms. The Reporter caught up with two financial and economic experts for a look at both sides of the coin.
Tewodros Mekonnen (PhD) is a senior macroeconomist for International Growth Center (IGC) and an executive member of Ethiopian Economics Association (EEA). Holding a postgraduate degree in economics research from the University of Leicester, Tewodros specializes in microeconometrics and development economics.
A proponent of the reforms, Tewodros is optimistic and argues it is too early to judge.
On the other hand, Abdulmenan Mohammed (PhD), a seasoned financial analyst keeping a close watch on the Ethiopian finance sector, argues the reforms have not had a meaningful impact on economic activity and questions the veracity of government data indicating otherwise.
The two experts had more to say:
The Reporter: Do you believe the floated exchange regime has achieved its stated goals, particularly in supporting exports?
Tewodros Makonnen (PhD): Indeed, if you look at export performance, the recently reported numbers are quite high—around USD 32 billion. But when you isolate actual forex earnings, it’s really only around eight billion, down from seventeen. That eight billion is the real export revenue.
Now, what people need to understand is that floating the exchange rate was long argued to benefit countries that have a production surplus on the supply side. In our case, did it actually bring that benefit? That’s the question many people are asking.
So beyond the forex flow, what’s the broader impact on economic performance? That’s what I have tried to address thoroughly. I’ve reviewed the export side, and yes, I’ve looked into it in full detail.
But to clarify one thing: the increase in export revenues might appear promising to you—but in reality, it’s not due to new export products. The export value has increased, yes, but this increase mostly comes from commodities that were previously smuggled and are now entering the official system.
Look at the data: coffee, live animals, and gold. These are the main additions. They’ve long existed, but used to dominate the smuggling trade. Now they’ve been redirected into the formal channel. Other commodities? Not much change. Why? Because improving our supply side is hard—it takes time. At the very least, it takes time.
Previously, with the 50 percent surrender requirement and high taxation on exports, exporters would avoid the official system. They preferred smuggling. That’s changed now. It’s not a surprise—smuggling is risky, and when the spread between the official and black-market exchange rates narrows, there’s no longer a strong incentive to smuggle.
So that’s the story of exports. That’s the general picture, but of course, there are many more details. Your initial question was broad, and to fully answer it we need to consider many elements. Elements like bank materials. What does a regime change mean? What are the actual trends? And how do you interpret early versus later developments?
Then there’s the question of why is there such a gap between the exchange rate at banks and forex bureaus? What kind of documents are banks requesting? What institutional factors are in play? Is the government really in control or not? There’s a lot to unpack. These are things I’ve spent a lot of time discussing in depth. When it comes to export performance, that’s the picture.
Recently, there was a study released by the Ethiopian Economics Association, and they quantified whether the Birr is overvalued or undervalued by a certain percentage. So now, when we talk about the current birr exchange rate—whether it’s fair or distorted—we need to go back to that data. Some people argue that under IMF guidance, the Birr-to-dollar exchange rate should have been around 134, not where it currently is.
How can we know the real value of the Birr today? Can we say the currency is overvalued or undervalued?
The terms ‘overvalued” and ‘undervalued’ really depend on whether the market is functioning freely. If the market is liberalized and allowed to respond on its own, it will signal the appropriate exchange rate. But when there is distortion in the market, that’s when we say there is overvaluation or undervaluation.
If, for example, the parallel market gives its own exchange rate signal independently, that alone doesn’t necessarily reflect the true value either. The parallel market doesn’t fully determine the fundamentals. Many different analyses exist, each offering a different perspective. And the ‘real value’ is always a hypothesis—it’s not a fixed or absolute truth. I don’t think it’s something you can pin down permanently.
To me, the idea that the fair value of the Birr is around 134 per dollar seems convincing. But even that needs continuous adjustment. The market is dynamic, always changing with time. The analysis must be ongoing—hourly, daily—because the exchange rate itself changes every day.
So yesterday’s fair value may not hold today, and today’s may not be valid tomorrow. The point is: When do you apply it? That depends on supply and demand dynamics, which are also ever-changing.
That’s why I don’t believe a fixed number can define the currency’s value. Instead, we need to understand how the exchange rate behaves and what factors drive it at a given moment.
Once we grasp that, we can track whether the trend is increasing or decreasing. That’s what deserves our focus. The goal is not to find a single ‘correct’ exchange rate figure, but to monitor the balance, watch the policy direction, and keep an eye on the trajectory. No country sits down and says, ‘one dollar equals this many pounds, and that’s the correct rate.’ That’s not how global exchange systems work. It’s not about fixing the value with scientific precision. It’s about reading the trend and understanding where things are headed—that’s what truly matters.
So overall, is your conclusion that the floating met its target? Was it successful?
No, not at all. I definitely didn’t say that. First of all, that would be a sweeping conclusion—and I only spoke about the export sector. That’s what I analyzed in detail.
When you zoom out to look at the bigger picture, you’ll see there are areas where serious problems exist, and others where things might be working okay. So we need to look at it holistically, assess things in balance, and consider all the relevant details.
And no—I definitely did not make a final conclusion like ‘Yes, the float was successful.’
You mentioned the Ethiopian Economics Association study. How do such studies help in shaping public understanding or policy on exchange rate reform?
The study published by the Ethiopian Economics Association quantified whether the Birr is overvalued or undervalued by a certain percentage.
So now, when we talk about the current birr exchange rate—whether it’s fair or distorted—we need to go back to that data. Some people argue that under IMF guidance, the birr-to-dollar exchange rate should have been around 134, not where it currently is.
Some say the parallel market is a more accurate indicator of supply and demand. Do you agree?
If, for example, the parallel market gives its own exchange rate signal independently, that alone doesn’t necessarily reflect the true value either. The parallel market doesn’t fully determine the fundamentals. Many different analyses exist, each offering a different perspective.
Would you say we are closer to a market-determined rate today than we were a year ago?
The market is dynamic, always changing with time. The analysis must be ongoing—hourly, daily—because the exchange rate itself changes every day. Yesterday’s fair value may not hold today, and today’s may not be valid tomorrow. The point is: When do you apply it? That depends on supply and demand dynamics, which are also ever-changing. That’s why I don’t believe a fixed number can define the currency’s value. Instead, we need to understand how the exchange rate behaves and what factors drive it at a given moment.
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The Reporter: It has been one year since Ethiopia floated its currency. One of the major targets was currency unification—bridging the gap between official and parallel forex market rates. Has this been achieved?
Abdulmenan Mohammed (PhD): This aim appears to be a pipe dream. The gap between the official and the parallel market rates is still wide. Several factors contribute to this situation, including the unavailability of sufficient forex in official channels, distortions in the official exchange rate stemming from the structure of the industry, and the closed-ness of the capital account.
Another major target was boosting export performance and discouraging imports. Has that been achieved?
Up-to-date reports on export performance and forex reserve levels are not available. The only source of information in these areas are claims from the officials of the NBE [National Bank of Ethiopia]; and their claims should be taken with a grain of salt.
Some argue price discovery remains speculative. What is your take on this?
I don’t think that price discovery has been well established so far. I believe that when the issues mentioned in the first question [insufficient forex, market distortions, closed-ness] are addressed, the official exchange rate will reflect the market rate. Then we can say price discovery has been achieved.
Has the floating contributed to inflation?
Inflation was declining well before the exchange rate regime reform due to tight monetary policy. This trend has continued despite the increase in the price of certain goods and services, such as fuel. It is obvious that there has been an economic slowdown since the beginning of tight monetary policy in August 2023. I don’t think that the exchange rate regime reform has had any meaningful impact on the overall performance of the economy.
The IMF has praised Ethiopia’s reform efforts but some cautious statements have emerged recently. What is the source of this cautiousness? How does Ethiopia’s economic performance since the floating affect its deals with the IMF, World Bank and other development partners?
Although the IMF praised Ethiopia’s economic performance, its report included some caveats. The risks arising from security challenges, declining donor support and climate shocks could hinder the reform efforts. The IMF also cautioned the NBE to have backup plans for declining forex supply and a widening spread between the official and parallel market rates. The need for prudent spending, revenue mobilization, and debt rework are other areas of caution.
So far, the reform has met all of the IMF’s quantitative performance criteria. As a result, Ethiopia has received substantial funding from the IMF. The support from the World Bank to strengthen the financial sector is going well.
Literature suggests Ethiopia’s economy responds minimally to monetary reforms. Government reports claim the economy has responded positively to the reforms. In addition, we see fiscal measures that contradict the monetary reforms, as evidenced by the recurrent budget exceeding the capital, and mostly budgeted for non-real sectors. How can the economy cope with the contradicting policies?
The Ethiopian economy responds to monetary reforms. The question is which aspect of the economy responds, in what way, and how long for. The government’s claim is partially true as it tells us the positive part of the story. But this does not show the whole picture. There are areas that the monetary reform significantly negatively affected. For instance, the massive losses of the NBE.
It is true that the government is pursuing a tight monetary policy while following an expansive fiscal policy. This approach will crowd out the private sector as the government requires substantial funding from the financial system. Furthermore, a significant amount of the government spending does not appear to be growth enhancing. This contradictory policy will remain for a reasonable period of time.
The government claims forex revenues have improved since the floating, owing to a narrowed forex spread and the formalization of the export of commodities like gold and coffee. How do you view these claims? Reports indicate parallel market rates peaked near 180 Birr per USD this week, leading to an NBE crackdown. What is behind the surge?
I don’t believe the government’s claims that the gap between the official and parallel market rate is closed. Currently, there is a gap of at least 15 percent.
The most probable reason for the parallel market rate shooting up to such a level is a sudden surge in demand. A sudden surge sometimes happens when a few people need a substantial amount of forex from the forex dealers abroad.
