Ethiopian Birr has Depreciated by 3 percent in the First Two Months of 2022

Historically, the Ethiopian Birr reached an all-time high of 50.77 in February of 2022.

The Birr’s movements have continued in 2022 to reflect the national bank aspirations for a steady and controlled depreciation as a managed currency.

The value of the US dollar to Ethiopian Birr (ETB) increased by 3.2 percent in the first two months of 2022, reaching an all-time high ETB 50.7667 on February 25, 2022, up from ETB 49.1936 on December 31, 2021.

Since February 25, 2021, comparing the 12-month USD-ETB exchange rate, the US dollar has gained a 27 percent increase in the value to ETB, or Birr has depreciated by 27 percent. The official exchange rate of 1 USD was 39.9368 on February 25, 2021.

As reported by The Reporter Newspaper early this month, the depreciation of Birr by 18 birr took only two years (between 2019 and 2022), compared to four years (between 2015 and 2019) to reduce its value by 11 birr. The depreciation of the Birr began in 2012 when the exchange rate was 17 birr per USD. Further adding, Ashenafi Endale of The Reporter argues that the last three years of depreciating the Birr are wreaking havoc on the economy.

Four years ago, on October 11, 2017, Ethiopia’s central bank made significant decisions to devalue the Ethiopian Birr by 15 percent in a single round as pressures on the foreign exchange intensified. The devaluation pegs the Birr at 26.91 to the dollar, up from 23.40 Br on the official market. Similarly, the National Bank of Ethiopia (NBE) has also announced that it has raised the main interest rate to 7 percent from 5 percent to stimulate savings and counter inflation. According to the Government, the devaluation was undertaken to encourage exports and overcome the foreign exchange shortages.

“The devaluation completely missed its initial targets because neither export increased, nor imports were discouraged. Rather, we have the negative byproducts of the devaluation, which is skyrocketing inflation,” said Alemayehu Geda (PhD), Professor of economics at Addis Ababa University – Quoted by The Reporter.

In The Reporter’s article titled ‘Has depreciating Birr missed its mark?’, Alemayehu argues that 90 percent of Ethiopia’s imports cannot be discouraged because they are critical imports like fuel, medicine, and strategic items. Furthermore, the Professor said, “Basically, the devaluation is the wrong policy for Ethiopia. Over 60 percent of industrial input in Ethiopia is imported. Only consumable durables, which are considered a luxury, might be discouraged. But vehicles are not a luxury now,”

According to Cepheus’ newest analysis, Ethiopia’s Birr has depreciated at an annualized rate of 26 percent in the 2021/22 fiscal year, much the same rate as the previous year. According to the study, the depreciation rate outpaced inflation for the entire last fiscal year (2020/21 FY), resulting in real currency depreciation. However, according to the research, the situation has turned around this year, with depreciation rates currently substantially below recent inflation rates, potentially contributing to a meaningful appreciation (strengthening) of the Birr if present trends continue.

In 2020/21 FY, the above report found little progress to increase the country’s foreign exchange inflows, which remains one of the economy’s main macro and business bottlenecks. Last fiscal year, foreign exchange inflows were close to $22 billion, essentially unchanged from previous years.

According to Cepheus, data accessible since July 2021 reveal a drop in the foreign exchange positions of both NBE and commercial banks (indicating a Balance of Payment deficit) since the current fiscal year began.

Based on various sources, the annual difference between official and parallel market rates had been between 25 and 30 percent on average for much of the last three years.

Ethiopia has operated a managed floating exchange rate regime since 1992.

The views and opinions expressed in this information are those of the authors and do not necessarily represent the official view of BIE Intelligence PLC or Business Info Ethiopia.