Prices fall in Ethiopia in the face of a flexible exchange rate

Prices on the menu at a small hotel on the outskirts of the Ethiopian capital have been erased. It was no mistake, say the waiters, as businesses in Addis Ababa struggle with rampant inflation since the government introduced a flexible exchange rate policy at the end of last month.

The value of the Ethiopian birr against the dollar has fallen by 60% since then, causing concern among customers, who are being forced to pay more for basic goods, and some businessmen, who are building up reserves.

menus at the Samra hotel in Bole, a leafy suburb of Addis Ababa, bear witness to this instability. At any given time, there is a new price for each meal. “Before, prices were updated every two months. Now they are updated every day, or even every hour, to reflect changes in the market,” says Rahel Teshome, who works at the hotel.

Many of Addis Ababa’s supermarkets store products in warehouses and only sell small quantities in their shops in order to avoid sanctions from the city’s authorities, who have promised to crack down on hoarders. When consumers want to buy in bulk, they have to pay high prices for the products they are asked to take from the warehouses.

In the capital’s largest open-air market, Merkato, guards are posted to try to prevent companies from raising prices. In the previous week, police raided some warehouses and confiscated 800,000 litres of cooking oil, which they then distributed to local cooperatives, who offered it at the previous prices. Around 3,000 shops accused of hoarding were closed across the country.

Addis Ababa’s city commerce office has warned that further action will be taken against those who take advantage of the floating birr to raise prices.

The new currency policy is a historic step forward in a country where, for decades, the government fixed the price of foreign currency, allowing the black market to flourish. Now commercial banks can set foreign currency prices, and non-bank entities are allowed to operate bureaux de change for the first time.

The International Monetary Fund approved a four-year credit facility worth $3.4 billion, coinciding with Ethiopia’s reforms. Immediately, the IMF committed $1 billion to meet urgent needs, with Managing Director Kristalina Georgieva describing the reforms as “a decisive turning point for Ethiopia”.

In a country where official wages have generally stagnated for years, Ethiopians are facing unpredictable days, according to experts.

Addis Ababa-based public policy expert Getachew T. Addis Ababa-based public policy expert Getachew T. Alemu, people on fixed incomes will be hardest hit by the floating birr, adding that the immediate injection of IMF funds will not be enough to absorb the pressure.

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“Things could really get worse, especially for people on fixed incomes, unless prudent policy measures are taken,” he declared.

Cracking down on fraudsters, the government seems unable to follow its own advice. The authorities last week increased the price of ordinary passports from 2,000 birr to 5,000 birr, shocking people like Almaz Teferi, who was about to apply for one.

Almaz and some of her friends are hoping to find work as domestic servants in one of the Gulf countries.