For decades, the Birr stood as a symbol of national economic policy sovereignty. However, its foundations have pulverised under a persistent axis of pressures: inflation, forex crunch and a widening budget and trade deficits. In a Parliament address a few months ago, Prime Minister Abiy Ahmed (PhD) warned of a painful remedy for the macroeconomic imbalance, likening the economic woes to a throbbing tooth.

Last week, with a single stroke, he announced its extraction.

His Governor for the National Bank of Ethiopia (NBE), Mamo Mehiretu, has opened the currency floodgates. A radical overhaul of foreign exchange regulations, effective July 29, 2024, marked a seismic shift from Ethiopia's tightly controlled economic model. "Historical" was how he characterised the monetary policy reforms during his public address in the wee hours a day after the Prime Minister issued a four-page macroeconomic policy statement.

Prime Minister Abiy justified his decision as necessary to address deep-seated economic structural issues, including distortions and macroeconomic imbalances. He stated that liberalising the foreign exchange regime is expected to enhance the financial sector's competitiveness and inclusiveness, ultimately promoting a sustainable economic environment. His administration is banking on these reforms to control inflation, improve public investment efficiency, and strengthen the banking industry’s health.

The night before, the Governor stayed up until midnight in his office on Sudan St., briefing the chief executives of all banks. The centrepiece of his new directive, issued the same night, is adopting a fully floating exchange rate. Long anticipated by some economists, while utterly shocking to others, it hands over the trade of the Birr's against a basket of major currencies to the executives and other market forces anticipated to join the industry legally, effectively ending a 50-year firm grip dictated by the state.

Governor Mamo announced early in the morning that the central bank had dismantled a host of restrictions.

Exporters can retain half their foreign earnings, surrendering the rest to banks at negotiated rates. Businesses can access foreign currency on demand, as the priority list system for foreign currency allocation is abolished. Authorities have issued a directive demanding that all idle foreign currency earnings be surrendered to commercial banks within a month, hoping to inject much-needed liquidity into the interbank market. Anticipating a broadened market participation, they invited non-bank foreign exchange bureaus into the fold.

The radical shake-up promises to transform the economy, and the financial sector, enhancing service delivery and expanding consumer access.

For decades, Ethiopia's economy struggled under the weight of foreign exchange crunches that stifled growth and nurtured inefficiencies. Abiy's administration targeted to resurrect these "inherited" problems.

"It should have been done decades ago," the Prime Minister said.

His decision to let the state grip loosen came after his Administration concluded protracted negotiations with the International Monetary Fund (IMF) for a bailout program and external creditors for debt restructuring. These talks secured financial aid from the IMF and World Bank to support his economic reform agenda, dubbed the Home-grown Economic Reform Program.

The IMF board of directors met a day after the government floated the Birr and approved a 3.4 billion dollar loan under the extended credit facility. The IMF said it wants to see Ethiopia address the balance-of-payments issues and consolidate public spending. The World Bank followed suit, pledging a 1.5 billion dollar package to support macroeconomic stability, trade, and social safety nets.

These Britton Woods institutions praised Ethiopia's commitment to market-oriented reforms, including currency market liberalisation and monetary policy adjustments.

Last week, Parliament approved a billion dollars in concessional loans and half a billion dollars the World Bank granted to support these reforms.

"We needed the reform," said Ahmed Shide, minister of Finance, addressing members of the federal legislative house last week. "There was no other way."

Minister Ahmed, along with his deputy Eyob Tekalegn (PhD) and Governor Mamo, negotiated the terms with the IMF, the World Bank and external creditors over the past three years. He assured federal legislators that the loans would be used for the federal government's supplementary budget.

"Our budget this year is bound to be excessive," he said, acknowledging that implementing home-grown reforms over the past five years has been inhibited by internal problems such as the war in the northern region, natural disasters, and international pressures.

He argued inflation would continue to subside, the debt burden would decline, and the balance of payments would improve following exchange rate reforms. He attributed the debt to massive public investment over the past 15 years, which would be mended through macroeconomic reform.

"This reform will substantially reduce our debt burden," he said.

However, experts have debated the notion that every dentist can successfully treat a tooth, and so too has the efficacy of floating the Birr as a panacea for Ethiopia's economic ills. Some warn that the government will need to tread carefully as it steers this uncharted water.

Political economy strategists like Dalaya Esayiyas have voiced their complete disregard for the reform on their virtual platforms. Dalaya equated the leaders of Ethiopia’s reform with economists who championed similar reforms in the late 1970s, where the blueprints led to disastrous consequences in Chile. She recalled that the policies of the "Chicago Boys," liberal economists at the time from the University of Chicago, thought by the monetary economist Milton Friedman, initially led to economic growth in Chile but also resulted in gross social inequality and economic instability.

The legacy of the Chicago Boys has shaped economic policies in many countries, contributing to the rise of what its critics claim is "neoliberalism", associated with economic growth but often blamed for benefiting the wealthy at the expense of the poor. Dalaya boldly claimed that the frontiers of Ethiopia’s reform are “serving as footsoldiers in dismantling its [policy] sovereignty,” while those in the lower economic curve are left to suffer from governance dysfunction.