On July 29, the National Bank of Ethiopia announced a major revision of the country's foreign exchange system, to take effect immediately. It said this reform introduces a market-based competitive exchange rate determination mechanism that will be able to resolve long-standing problems in Ethiopia's economy.

According to the announced foreign exchange reform, the main thrust is a shift to a market-oriented foreign exchange system. A series of transition measures include moving to a market-based exchange rate regime, allowing exporters and commercial banks to retain foreign exchange, lifting the previous import restrictions on 38 product categories, allowing exporters to retain up to 50% of their foreign exchange earnings, establishing non-bank foreign exchange bureaus, simplifying rules for managing foreign currency accounts, providing allowances for residents to open foreign currency accounts abroad, removing the cap on interest rates when borrowing from abroad, opening Ethiopia's securities market to foreign investors, and relaxing limits on the amount of foreign currency that can be carried in and out of Ethiopia.

The Ethiopian government believes that the foreign exchange reform is crucial for resolving the severe foreign exchange shortage, improving export competitiveness, attracting foreign direct investment and complementing a number of other macroeconomic reforms, in order to improve the conditions for the private sector to grow and prosper in Ethiopia's economy.

It can benefit millions of Ethiopians across multiple foreign exchange-generating sectors, such as farmers involved in the production of exportable crops including coffee, sesame, pulses and flowers, herders exporting cattle and meat, workers engaged in mining, and thousands of businesses in the services and tourism sectors.

It is understood that Ethiopia's economy has grown rapidly in recent years, but the foreign exchange shortage has always been a major problem in the country's economy. Therefore, for many years, Ethiopia has implemented strict foreign exchange controls to curb capital outflows and stabilise the exchange rate.

But this strict foreign exchange control also brought many problems, leading to opaque transactions in the foreign exchange market, rampant black markets, and difficulties for businesses and investors in obtaining foreign exchange, which is why this revision of foreign exchange policy came about. In addition, Ethiopia's partners (the International Monetary Fund and the World Bank) provided 10.7 billion USD in financing support for this reform.

However, shortly after this mechanism was announced, the foreign exchange rate fell noticeably. According to reports from the Commercial Bank of Ethiopia, the buying rate changed from 57 birr to 74 birr per 1 USD, and the selling rate changed from 58 birr to 76 birr per 1 USD, a depreciation of as much as 30% in a single day. And by today, July 31, the Commercial Bank of Ethiopia released the latest exchange rate of 80 birr to 1 USD. For this reason, some local residents said that a rate of 100 birr to 1 USD may possibly appear.

For coffee, Ethiopia's main export commodity, the depreciation of the Ethiopian birr helps improve the international competitiveness of Ethiopian coffee and is beneficial to exports in the short term.

In addition, the Ethiopian government decided to minimize the price impact on basic imported goods such as fuel, fertilizer, medicines and edible oil through temporary subsidies and price changes. However, at present, prices of various consumer goods in Ethiopia have risen sharply, with some goods increasing by 50%-100%, putting great pressure on local consumer groups. The cost of coffee cultivation will also increase, and Ethiopian coffee prices may rise accordingly in the future.