In 2019, when the current government came into power, the Ethiopian Birr was valued at around 30 ETB to 1 USD. Historically, Ethiopia's currency had been fixed by the national bank, maintaining relative strength and stability compared to other African currencies. However, by July 2024, after several adjustments due to the COVID-19 pandemic, inflation, and a cost-of-living crisis, the Birr had depreciated significantly to 57 ETB to 1 USD.
On the black market, the exchange rate was heavily impacted, with the dollar being exchanged at over 110–118 ETB to 1 USD due to a chronic foreign currency shortage. This disparity, along with rising living costs, has left many Ethiopians struggling to make ends meet.
In response, the Ethiopian government reversed its long-standing fixed exchange rate policy as part of securing a loan from the International Monetary Fund (IMF). In July 2024, the government accepted a US$3.4 billion IMF loan, bringing significant economic reforms intended to stabilize the economy, support the budget, and make the economy more inclusive for all Ethiopians.
One immediate consequence was the sharp devaluation of the Birr, dropping from 57 ETB to 1 USD to around 112–114 ETB to 1 USD by early August 2024—a 100% devaluation in just 10 days. This rapid devaluation, combined with Ethiopia's high dependency on imports, is expected to cause inflation to rise, impacting the cost of goods and services across the board.
For the international development sector, this could lead to increased costs for program implementation and a reduction in the purchasing power of funds allocated for development projects.
Ethiopia's inflation rate post-flexible exchange rate implementation
According to the National Bank of Ethiopia's Financial Stability Report in April 2024, Ethiopia, which had previously experienced double-digit inflation, saw a peak inflation rate of 35.1% in December 2021. By December 2022, inflation had stabilized slightly at 33.8%. Projections suggested a decrease to 24.5% by the end of 2023 and further to 18.5% by the end of 2024. However, there have been no recent updates from the National Bank on the impact of the newly implemented flexible exchange rate policy.
An article from the Associated Press, dated August 12, 2024, reported that since the Ethiopian government introduced the flexible exchange rate in July 2024, the Ethiopian Birr has depreciated by 60% against the US dollar. This rapid devaluation has led to significant price hikes for basic commodities, raising alarm among consumers.
The ongoing cost-of-living crisis is hitting many Ethiopians hard, especially public sector employees such as teachers, nurses, and doctors, who are finding it increasingly difficult to make ends meet despite working full-time. Recent months have seen substantial increases in rent and food prices, further exacerbating the financial strain on households.
Impact on International Development Programs
At the micro level, international development programs are experiencing rising operational costs due to fuel price hikes and the devaluation of the Ethiopian Birr. This necessitates closer monitoring of project budgets to prevent overspending and ensure resources are being utilized effectively. Programs may need to scale back activities, reconsider plans, or seek additional donor funding to ease financial pressures and keep projects on track.
However, for programs with existing and approved USD-denominated budgets, the Birr devaluation presents a unique advantage. These programs may realize savings, which can be reallocated to other priorities, after accounting for any budget gaps resulting from inflation.
At the macro level, Ethiopia’s worsening economic situation is likely to have a severe impact on public health and poverty. Inflation is driving up the cost of basic needs like oil and grains, making them unaffordable for many. Although the government has proposed salary increases for low-paid workers, these measures are still pending and will only benefit those on minimum wage. Meanwhile, the broader poor and middle-class populations continue to face increasing financial strain, with little relief in sight.
Salaries for civil servants
According to a September 6, 2024, article by Addis Insight, a significant wage increase is set to take effect on September 11, 2024, as part of the Ethiopian government’s macroeconomic reform. This development was detailed in a letter from Finance Minister Ahmed Shide to the Prime Minister's office, which has been widely circulated on social media.
The letter confirmed that over 91.4 billion Birr has been allocated for the salary adjustment, set to begin on September 1, 2024, pending approval from the Council of Ministers. The new structure heavily favors lower-income earners, with individuals earning 1,100 Birr seeing a 332% salary hike, bringing their income to 3,660 Birr. In contrast, higher earners, such as those receiving 20,468 Birr, will experience a modest 5% increase, raising their salary to 21,491 Birr.
Conclusion
In conclusion, the sharp devaluation of the Ethiopian Birr has far-reaching implications for inflation, the economy, and international development programs. While the depreciation will likely result in rising costs and inflationary pressures, programs with USD-denominated budgets stand to benefit from currency savings, offering some relief in reallocating funds. As Ethiopia navigates these economic reforms, both the public and development sectors must adapt to mitigate the challenges posed by the devaluation while seizing opportunities to maintain program effectiveness and economic stability.
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