Last week, a soap and detergent manufacturer was in the middle of finalising a seven million Birr import payment for chemicals, mandatory input for his production. On July 29, 2024, he was hit with jaw-dropping, gut-wrenching news. The federal government has dropped a bombshell strategy of allowing market forces of supply and demand to determine the foreign exchange rates. Poof, a four million Birr loss overnight.

“I was in shock!” said the general manager, who opted for anonymity.

According to him, the detergent industry already suffers from security issues which have hampered market access.

“It feels like a final nail in the coffin,” he told Fortune.

With the unprecedented shipping costs and increased customs duties based on the inflated import payments, the general manager anticipates further cost escalation.

"Obviously, I'll add it to the final price," he told Fortune.

The first week following the National Bank of Ethiopia’s (NBE) bold decision to float the currency was tough for business owners. Those in the middle of transactions lost millions. While the supply and demand seem to have frozen wabbling in uncertainty. The directive introduced major changes to Ethiopia’s foreign exchange regulations through the new Foreign Exchange Directive.

Floating the currency is a remedy, not a new economic structure.

According to Fikadu Degafe, vice governor of the central bank, these reforms aim to address currency shortages, promote economic growth, and create a more competitive and transparent foreign exchange market. He said the adoption of a market-based monetary policy is an essential step towards addressing long-standing macroeconomic constraints.

The central bank's three-year strategy aims to achieve robust macroeconomic stability through quantitative goals, such as increasing foreign currency reserves and maintaining an exchange rate that avoids major discrepancies with the parallel market. The most notable change is allowing banks to buy and sell foreign currencies at freely negotiated rates, with the NBE intervening only to prevent market disorder.

For Tewodros Mekonnen (PhD), a macroeconomist, the move is a long-awaited measure to address 15 years of market distortions and macroeconomic instability.

"Floating the currency is a remedy, not a new economic structure," he told Fortune.

He noted that the previous plans led to exchange rate distortions, balance-of-payments problems, and depleted foreign reserves. However, Tewodros expected short-term economic pain, particularly inflation.

Tewodros also emphasised the importance of peace and security, alongside critical infrastructure investments. He urged the government to invest loans effectively in infrastructure, human capital, education, and health. Long-term solutions, he noted, would require monetary tightening and fiscal discipline to prevent issues like undisciplined money printing by the National Bank, which has contributed to exchange rate, balance of payments, and inflation problems.

“The reform is a necessary condition, not a sufficient one,” he said.

The directive abolished the priority list system for foreign currency allocation, which prioritised essential goods. Instead, it ensures foreign exchange is available on demand, simplifying access for importers and fostering a more equitable and transparent system.

In his briefing last week, Central Bank Governor Mamo Mihretu disclosed that the flight of economic activity to the black market—with adverse consequences such as tax evasion and loss of economic control—necessitated policy measures allowing the market to determine the exchange rate directly. He predicts that the policy will attract substantial foreign exchange inflows and investments while offering more autonomy to exporters in managing their foreign exchange income.

While Mamo lauded the new policy as beneficial for exporters, exporters report price surges for commodities, sending shockwaves through the market.

According to Yihunew Demelash, general manager of Maraki Trading Plc, coffee, oilseed, and pulses prices have surged in the past few days, complicating their export plans. Yihunew observed the price of coffee increasing by 300 Br in the week. He claims that suppliers have resorted to hoarding the commodities.

He said: "Suppliers are hoarding commodities, affecting our ability to export."

His company supplies over 60 containers of coffee, sesame, and soybean commodities to international markets in China, Israel, Europe, and Saudi Arabia. Prices for Sesame, the third most exported commodity have seen a surge of domestic prices by 3,000 Br, within the week following the currency float. Yihunew said domestic market stabilisation is essential for creating a beneficial environment for exporters. However, the new trend does not present clear benefits for them.

According to Yihunew, international buyers have also backtracked on their decisions during the week, demanding price renegotiations.

"It's a scary time for exporters," he said.

In contrast, Gizat Worqu, a leading coffee export business figure and general manager of the Ethiopian Coffee Association, sees the benefit. He noted that exporters have been forced to sell commodities at a loss, while others have been discouraged from participating.

Despite various policies over the decades, Ethiopian coffee exports have hovered around a billion dollars, reaching an all-time high last year of 1.43 billion dollars from 298,000tns. Gizat anticipates that over 300 million dollars have been lost due to the mismatch of international prices with domestic prices. He believes that currency float is a step forward to encourage exports and increase foreign currency inflows.