A new report states that the gap between the Ethiopian currency’s official and parallel market exchange rate against the US dollar widened to a new record high. The rate plunged 92 birrs for every dollar.
Fikadu Digafe, the vice governor and chief economist at the National Bank of Ethiopia (NBE), said the resumption of hostilities in the Tigray region is one of the key factors that caused the Ethiopian currency’s latest plunge. He highlighted the imbalance between the supply of foreign exchange and the demand as a problem that afflicts the country Digafe said the high cost of the war meant the NBE’s monetary policies are now largely futile.
Ethiopia has also been grappling with the problem of dwindling foreign exchange reserves. The state’s reserves were $3.3 billion by the 2021-end which was enough to cover Ethiopia’s import costs for just 1.9 months. Moreover, its central bank data shows that real GDP growth slowed to 6.1% in 2020, from 9% the previous year, despite the support of public spending.
In an effort to enhance the country’s foreign exchange reserves, the NBE effectively devalued the birr by 26% between February and May. The central bank also imposed restrictions and controls on the amount of foreign exchange that Ethiopians are allowed to take out of the country.