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Ethiopia’s birr falls 30% as central bank starts currency float

Published

2 months ago

July 29, 2024

Ethiopia’s central bank on Monday floated the country’s currency, the birr, in an attempt to resolve the long-delayed debt restructuring deal.

The largest lender in the nation, Commercial Bank of Ethiopia, said that the value of the birr fell by 30% versus the US dollar to 74.73 per dollar. On Friday, the exchange rate was 57.48 birr to the US dollar.

Late last year, the country in the Horn of Africa—which has been dealing with extreme inflation and ongoing shortages of foreign currency—became the third economy on the continent to default on its public debt in as many years.

It has been in discussions with the International Monetary Fund (IMF) to create a new credit program, as the last one that was agreed upon in 2019 and sponsored by the fund was cancelled because of fighting in Tigray’s northern province.

Statements on the float from the central bank stated that “banks are henceforth allowed to buy and sell foreign currencies from/to their clients and among themselves at freely negotiated rates” and that it will only be making “limited interventions” in the FX markets going ahead.

Prime Minister Abiy Ahmed first unveiled the measures late on Sunday.

In a video posted online, Governor Mamo Mihretu of the central bank said that Ethiopia would receive $10.7 billion in external finance assistance from the World Bank, IMF, and other creditors as part of the reforms.

“The IMF and World Bank are both providing exceptional and front-loaded funding support that will be among their highest such allocations in the African continent,” he said.
Importers, who had been relying on the black market to secure dollars, expressed relief at the central bank’s move.

“Now I don’t need to go to the black market to buy or sell dollars. It is now a market-based foreign exchange regime, so (we) will buy or sell based on the legal channels,” said a businessman in Addis Ababa, the capital, who wished to remain anonymous.

The IMF did not immediately provide a statement. Monday saw a slight decline in Ethiopia’s primary $1 billion government bond, which had recently rallied to its highest point since early 2022.

The transition to a foreign exchange rate set by the market was welcomed by the US.

“Market-based FX is a difficult, but necessary step for Ethiopia to address macroeconomic distortions,” the United States embassy in Addis Ababa posted on social media platform X.

The civil conflict in Tigray halted progress in Ethiopia’s request for a debt restructure under the Group of 20’s Common Framework procedure in early 2021. Ethiopia is the second most populous country in Africa.

A new IMF reform program is reportedly tied to the economic reforms the administration has already disclosed, including the adoption of an interest rate-based monetary policy earlier this month, according to analysts.

Related Topics:Currency float Ethiopia Featured

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Nigeria’s central bank issues fresh guidelines for ‘Ways and Means’ to govt

Published

9 hours ago

September 18, 2024

Ifeoluwa Dada

The Central Bank of Nigeria (CBN) has issued new guidelines on Ways and Means which limit Ways and Means Advances to the federal government to 5% of the previous year’s revenue collection.

The apex bank made the position known in its fiscal year 2024-2025 monetary, credit, international trade, and exchange policy guidelines.

“Ways and Means Advances shall continue to be available to the Federal Government to finance deficits in its budgetary operations to a maximum of 5.0 per cent of the previous year’s actual collected revenue. Such advances shall be liquidated as soon as possible and shall in any event be repayable at the end of the year in which it was granted,” it said.

The Treasury Single Consideration (TSA) system requires these advances to take into consideration Ministries, Departments, and Agencies (MDAs) sub-accounts, which are linked to the Consolidated Revenue Fund.

The federal government’s consolidated cash situation will be more precisely reported, improving public financial management openness and resource availability. The CBN also stated that Ways and Means Advances must be repaid by the end of the fiscal year they were awarded, encouraging short-term borrowing.

In the Nigerian context, “ways and means” refers to the Federal Government’s ability to borrow money from the Central Bank of Nigeria (CBN). This means that the government may use “ways and means” to meet short-term needs or emergencies, which is why the CBN is referred to as the “lender of last resort.”

Over the past seven years, the facility had grown 2,900% to an extraordinary N23.7 trillion by 2023. This fast surge, which exceeded legal restrictions, increased inflation and Nigeria’s debt.

The CBN Act allows the bank to grant temporary advances to the federal government for budget revenue deficits at a rate deemed appropriate, but the total amount of such advances “shall not at any time exceed 5% of the previous year’s actual revenue of the Federal Government.”

In addition, it stipulates that “All advances shall be repaid as soon as possible and shall, in any event, be repayable by the end of the Federal Government financial year in which they are granted and if such advances remain unpaid at the end of the year, the power of the bank to grant such further advances in any subsequent year shall not be exercisable, unless the outstanding advances have been repaid.”

The Senate and House recently enacted a bill to increase the CBN’s federal Ways and Means borrowing ceiling. The upper chamber of Nigeria’s legislature boosted the central bank’s loan capacity to the federal government from 5% to 10% of annual income.

Yemi Cardoso, CBN governor, announced earlier this year that the bank would stop making Ways and Means advances to the federal government until existing loans were returned. He said this is one of the bank’s key strategies to handle the country’s economic issues.

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Kenya, IMF discuss economic and fiscal issues

Published

15 hours ago

September 18, 2024

Ifeoluwa Dada

The International Monetary Fund (IMF) said on Tuesday that it had had productive discussions with Kenya’s government on its economic and fiscal goals after widespread protests prompted it to shelve tax rises.

In June, President William Ruto abandoned this year’s finance bill, leaving the deeply indebted government with a larger budget deficit, unpaid payments, and a delay in IMF funding.

“We remain fully committed to supporting the authorities in their efforts to identify a set of policies that could support the completion of the reviews under the ongoing program as soon as feasible,” the IMF said in a statement.

Kenya signed a four-year IMF loan in 2021 and another for climate change measures in May 2023, totalling $3.6 billion. The country secured a staff-level agreement with the IMF on its seventh review in June, but the protest and finance bill withdrawal delayed the executive board’s sign-off and payout.

Public debt helps development. Governments utilise it to fund spending, protect and invest in their citizens, and improve their futures. However, too quick governmental debt growth can be a burden. The developing world which Africa forms core is experiencing this.

Kenya’s government debt was 70.10% of GDP in 2023. Kenya’s government debt to GDP averaged 56.36% from 1998 to 2023, peaking at 78.30% in 2000 and falling to 38.20% in 2012.