Ethiopia has spent approximately $2.2 billion this year in an attempt to bolster its currency, the birr, yet the currency has continued to slide to record lows. The birr has depreciated by 3.2% against the dollar this year, reaching nearly 162 birr per dollar, making it the weakest-performing currency among 23 African currencies tracked by Bloomberg over the past year. This pressure on the birr is exacerbated by rising global oil prices, which increase Ethiopia's import costs and reduce the availability of foreign currency.
The demand for U.S. dollars significantly outstrips the supply from the central bank. For instance, at a recent dollar auction, bids were roughly four times the amount of dollars offered. This imbalance has led to a growing disparity between the official exchange rate and the black-market rate, where the dollar trades for about 180 birr in Addis Ababa, approximately 15% above the official rate.
These interventions by the central bank risk depleting Ethiopia's foreign-exchange reserves, which were estimated at about $5.9 billion by an IMF report in July. Analysts hold differing views on the birr's future. Sarah Baynton-Glen, an Africa economist at Standard Chartered, anticipates a slowdown in depreciation, forecasting an exchange rate of 163 birr per dollar by year-end. Conversely, David Cowan, chief Africa economist at Citigroup, projects a potential weakening to between 185 and 195 birr per dollar by year-end, although he expects authorities to prevent it from exceeding 200 birr per dollar.
Adding to the currency's woes, demand for foreign currency is expected to remain high ahead of Ethiopia's New Year on September 11, driven by increased imports and letters of credit. The government also foresees a wider budget deficit in the current fiscal year, partly due to increased spending on fuel subsidies, further straining the country's financial stability.
