Birr in Freefall: Ethiopia’s struggle with record currency depreciation, imported inflation risk

In late July 2024, the Government of Ethiopia, as part of its Homegrown Economic Reform Agenda II, initiated a significant policy shift, moving from a crawling-peg to a market-based exchange rate system. This crucial adjustment was undertaken to address persistent economic distortions, most notably a parallel market premium that surpassed 100 per cent. The transition aimed to achieve several vital objectives: to bring the official exchange rate into alignment with market realities, to eliminate foreign exchange distortions, and to secure essential international financial support. However, this change immediately precipitated profound and instantaneous macroeconomic consequences.

The local currency, the birr, underwent an unprecedented and rapid depreciation against a basket of major hard currencies, particularly the US dollar. The depreciation accelerated sharply within days following the move to the market-based regime. The official exchange rate quickly surged from 56 birr per dollar to 83 birr per dollar. This trajectory continued: by October 2024, the rate had breached the 100 birr/USD threshold, and by mid-November 2025, it exceeded 150 birr/USD—a total depreciation of over 165 per cent in a span of just 15 months.

The magnitude of the birr’s depreciation becomes even more stark when considering the exchange rate outside the formal banking system. Authorised forex bureaus were reportedly exchanging a dollar for 177 birr last week, marking a depreciation of over 216 per cent since August 2025. The exchange rate in the parallel (black) market stood even higher, approaching 180 birr per dollar, underscoring the continued and rapid depreciation of the birr.

Float on paper, freefall in reality

It is not uncommon for countries to experience sharp currency depreciation following a transition to a more market-based exchange rate system. Such regime shifts often reveal the true market value of a currency that had previously been supported by administrative controls or multiple exchange windows. Nigeria provides a recent example. In 2023, its authorities undertook a substantial reform to unify and liberalise the foreign-exchange market after years of parallel rates and tight regulatory management. Once restrictions were lifted, the exchange rate rapidly adjusted, and the previously suppressed gap between official and market rates closed.

Sri Lanka’s experience followed a similar pattern. In March 2022, the country moved to float the rupee amid a severe balance-of-payments crisis, rapidly declining foreign-exchange reserves, and ongoing sovereign debt distress. The shift to a market-determined currency was part of broader stabilisation efforts aimed at restoring credibility, mobilising external support, and rebalancing the economy.

What distinguishes these cases from Ethiopia, however, is the magnitude of the subsequent depreciation. Fifteen months after the Central Bank of Nigeria implemented a major foreign exchange market reform, the Nigerian naira fell by roughly 130 per cent. Sri Lanka experienced a similarly dramatic adjustment, with the rupee depreciating by about 62 per cent against the US dollar within 15 months following the float.

Yet, even against this backdrop of severe currency adjustments, Ethiopia’s experience stands out for its sheer velocity and magnitude. Within just 15 months of its move toward a market-based exchange rate framework, the birr depreciated by a maximum of 216 per cent (based on rates recorded at authorised foreign-exchange bureaus), reflecting a significantly larger realignment than those seen in Nigeria and Sri Lanka.

What distinguishes these cases is not merely the percentage drop but the context in which it occurred. Nigeria and Sri Lanka implemented reforms amid urgent but somewhat contained crises, supported by international financial assistance. Ethiopia’s transition, while equally necessary, took place under more constrained circumstances—with less fiscal space, weaker institutional buffers, and a population already grappling with acute food insecurity and rising poverty.

The rapid depreciation of the Ethiopian birr over the past 15 months also marks the most severe erosion of the currency’s purchasing power in the nation’s history, surpassing the declines recorded during previous devaluations in 1992, 2010, 2015, and 2019. Among these earlier adjustments, the most significant occurred in October 1992, when the birr was devalued by 142 per cent, from 2.07 birr to 5 birr per dollar. Subsequent devaluations in 2010, 2015, and 2019, by comparison, were considerably more modest, each resulting in less than a 50 per cent decline over the course of a year. The current depreciation, however, is not only larger in magnitude but also faster and more destabilising, carrying far-reaching consequences for ordinary Ethiopians.

Exchange rate pass-through: Mechanism driving imported inflation

The macroeconomic reforms accompanying Ethiopia’s transition to a market-based exchange rate system, and the subsequent depreciation of the birr, have produced notable positive outcomes. Export revenues increased by 118 per cent in the 2024/25 fiscal year, led primarily by gains in gold and coffee, contributing to a $4 billion improvement in the current account balance. Overall, Ethiopia’s foreign exchange earnings reached $32 billion during the fiscal year, derived from commodity and service exports, remittances, foreign direct investment (FDI), borrowing, and development assistance. This figure marks a 33 per cent increase from the previous year’s $24 billion and reflects strengthened external sector performance following years of suppressed competitiveness under the managed exchange rate system. In addition, the adoption of a market-determined exchange rate helped unlock long-awaited concessional financing from institutions such as the World Bank and the International Monetary Fund (IMF).

However, these benefits have been accompanied by short-term inflationary pressures. Rapid currency depreciation has become a central transmission channel for escalating commodity prices, sharply reducing consumer purchasing power and posing risks to price stability. As import prices rise—particularly for essential consumer goods, semi-finished products, fuel, pharmaceuticals, and industrial inputs—cost-push inflation has intensified across the economy.

Ethiopia’s structural dependence on imported fuel, fertiliser, intermediate goods, and capital equipment magnifies this challenge. A weaker birr directly raises the local currency cost of these imports, increasing the prices of key components in the consumer price index (CPI) and driving production costs throughout supply chains. In an import-dependent economy such as Ethiopia’s, exchange rate depreciation affects domestic inflation through both direct and indirect channels.

The direct effects are explained by the concept of exchange rate pass-through (ERPT), which measures the extent to which fluctuations in the nominal exchange rate translate into domestic prices. According to the National Bank of Ethiopia’s latest annual report, the merchandise import bill reached $18.4 billion, with consumer and semi-finished goods accounting for approximately 48 per cent of total imports. In addition, Ethiopia spends roughly 197.5 billion birr annually on petroleum products. These figures underscore the scale of exposure to external price movements and currency volatility.

Other Topics To Read

• Regional
• Ethiopia
• Ethiopian economy
• Birr
• Ethiopian birr
• Birr in Freefall: Ethiopia’s struggle with record currency depreciation
• imported inflation risk

A useful demonstration of the direct inflationary impact of depreciation can be observed by tracking the domestic price movements of key imported goods such as cooking oil and sugar. Over the past year, the price of a five-litre container of imported cooking oil has risen by more than 120 per cent, while a kilogram of imported sugar has increased by over 150 per cent. These price surges closely mirror the cumulative depreciation of more than 165 per cent recorded after the country transitioned to a market-based exchange rate system, illustrating the intensity and immediacy of exchange rate pass-through in Ethiopia’s inflation dynamics.

From currency depreciation to higher production cost

The indirect inflationary effects of a rapidly depreciating local currency are best understood through the import price channel, a mechanism through which exchange rate movements ripple through domestic cost structures. A sharp fall in the value of the birr raises the local-currency cost of imported intermediate inputs, including machinery, spare parts, agricultural chemicals, industrial components, and other raw materials.

Given Ethiopia’s strong reliance on imported inputs for production, this cost-push effect becomes substantial. Industries dependent on imported goods face immediate increases in production costs. Firms are then confronted with two choices: either absorb these higher costs—resulting in shrinking profit margins—or pass them on to consumers in the form of higher prices. In both scenarios, depreciation indirectly fuels domestic inflation even when the final product is manufactured locally rather than imported.

The implications extend beyond price increases. Manufacturing and agro-processing firms that depend heavily on imported inputs experience financial pressure, which can lead to reduced investment, weakened competitiveness, or workforce reductions. At present, the cost-push impact is visible across multiple sectors. Heavy industries, including metal fabrication plants, have faced sharp increases in input prices. Similarly, tanneries and leather-processing factories—key contributors to Ethiopia’s export base—are also grappling with rising import bills for chemicals and semi-finished materials. Over time, these challenges may hinder industrial expansion, limit productivity improvements, and slow employment growth. In this way, rapid currency depreciation not only influences consumer prices in the short term but also carries broader macroeconomic consequences by weakening industrial development and undermining the structural transformation required for sustainable growth.

Rapid currency depreciation doesn’t just make imported goods costlier at the retail counter—it quietly restructures the entire production landscape. The birr’s decline may begin as a macroeconomic headline, but its true impact is felt in factory floors, supply chains, and household budgets alike. In short, the impact of currency depreciation extends beyond exchange rate fluctuations. By increasing the cost of essential imported inputs, it can introduce inflationary pressures, weaken industrial performance, and disrupt economic progress through cost-push dynamics that originate outside domestic production processes.

Socioeconomic effects: Low-income households hit hard

The rapid depreciation of the birr has had profound and uneven socioeconomic consequences, particularly for low-income households. For many such families, food and transportation expenditures account for more than 70 per cent of their total spending. As a result, imported inflation operates much like an income tax on households that hold cash but lack significant assets. In contrast, individuals and firms with export earnings or foreign-currency income are relatively shielded and may even benefit from exchange-rate movements. This dynamic disproportionately affects vulnerable groups, including rural subsistence farmers, casual labourers, and the urban poor, who have limited capacity to adjust to rising living costs.

The World Bank’s recent assessment of poverty and inequality in Ethiopia underscores the gravity of the situation. According to the report, the combination of sustained price increases, job market pressures, and stagnant real incomes is pushing already fragile households deeper into food insecurity. The Bank forecasts that poverty could rise to 43 per cent by 2025—up from 33 per cent in 2016 when measured at $3 per day in 2021 purchasing power parity (PPP). Such a sharp increase highlights the extent to which macroeconomic shocks translate into worsening welfare conditions at the household level.

The World Bank further notes that inflation has been particularly damaging to urban households, who rely heavily on market purchases for food. Meanwhile, most rural households did not gain from rising food prices because their market participation is limited, and many remain net consumers rather than net producers. Taken together, these developments illustrate the regressive nature of currency-driven inflation.

The most vulnerable—casual labourers, informal traders, female-headed households, and displaced communities—are those least equipped to adapt. Their resilience is being tested not by a single crisis, but by the convergence of structural weaknesses and external shocks. Without targeted social protection, price stabilisation measures, and inclusive economic policies, the rapid depreciation of the birr risks entrenching a new and deeper layer of poverty—one that could undermine Ethiopia’s long-term development trajectory.

Conclusion: Managing pain amid reform

The Government of Ethiopia’s shift to a market-determined exchange rate, while a necessary structural adjustment to eliminate severe parallel market premiums and unlock critical international finance, has unleashed a shock of unprecedented magnitude. Compared to similar reforms in Nigeria and Sri Lanka, the birr’s depreciation—by a maximum of 216 per cent in 15 months—was uniquely fast and deep, occurring within a context of constrained fiscal space and heightened vulnerability.

The inflationary impact of rapid depreciation is now the central macroeconomic risk confronting Ethiopia. Exchange rate pass-through has been strong, raising the domestic cost of imported goods, particularly fuel, fertiliser, industrial inputs, and consumer necessities. The production side of the economy is also experiencing strain as firms face higher costs for machinery, chemicals, and raw materials. These cost-push pressures weaken industrial competitiveness, squeeze margins, and threaten employment in sectors critical to Ethiopia’s structural transformation. The resulting inflation is therefore not only a household burden but also a constraint on the country’s long-term development prospects.

For low-income households, the consequences have been particularly severe. With food and transportation representing a large share of consumption, imported inflation functions as a regressive tax on those with limited financial resilience. The World Bank’s poverty projections indicate a significant rise in deprivation, disproportionately affecting the urban poor, rural subsistence households, and informal labourers. Without timely intervention, the depreciation risks deepening inequalities and widening socioeconomic divides, undermining the very reform agenda intended to stabilise the economy.

Going forward, the immediate priority must be aggressive measures to mitigate imported inflation and stabilise domestic prices. This requires the National Bank of Ethiopia to maintain a tight monetary policy stance to anchor inflationary expectations and restrict excess liquidity. Furthermore, the government must strategically manage foreign exchange for essential imports, ensuring an adequate and steady supply of fuel, fertiliser, and basic pharmaceuticals to dampen price volatility and reduce the direct pass-through effect on the consumer price index.

To counteract the regressive effects of inflation, there must be an immediate, comprehensive expansion of targeted social protection programs. This includes scaling up cash transfer schemes, expanding food assistance, and linking safety nets to inflation indices to protect the real income of low-income households, female-headed households, and displaced communities. Simultaneously, efforts to boost the domestic supply of essential goods, particularly food staples, must be accelerated to lessen the structural dependence on imports and reduce the economy’s overall exposure to exchange rate shocks.

For the exchange rate reform to secure sustainable growth, the government must move quickly to address the structural bottlenecks highlighted by the indirect cost-push effects. This involves investing strategically in import-substituting industries and strengthening the domestic supply chain for key industrial inputs (machinery, chemicals). Crucially, the government must ensure that financial sector reforms provide adequate, affordable financing to firms facing higher input costs, enabling them to invest in efficiency and technology rather than simply passing costs to consumers or cutting jobs. Only through such coordinated action can Ethiopia fully harness the long-term benefits of its float while managing the immediate, painful costs.

Editor’s Note: Samson Hailu, the author of this commentary, holds a Master of Business Administration with a specialisation in finance and a Bachelor of Arts in Economics. He can be reached at [email protected]