The Birr took a notable tumble over six days last week, marking a continued turbulent time in recent memory. The National Bank of Ethiopia's (NBE) decision to float the currency, a historic move that sought to align the official exchange rate with the parallel market, broke away from years of strict currency control and sent ripples through the economy.

The steep depreciation of the Birr against the U.S. dollar reflected the mounting economic pressures and a major policy overhaul. The widening gap between buying and selling rates at banks painted a picture of volatility. On August 12, the Birr traded at an average buying rate of 102.09 Br for a dollar, while selling rates soared around 117.4120. The 15pc difference indicated the premium for buying dollars, signalling high demand and a limited supply in the market.

Fast forward to August 17, and the situation escalated.

The buying rate climbed to an average of 104.82 Br, with selling rates surging to 119.5 Br. Although the spread narrowed slightly to 14pc, the relentless rise in rates uncovered a forex market of ongoing apprehension as the market adjusted to the new floating regime. The rapid depreciation showed Birr's struggle against mounting pressures, with supply-demand imbalances for foreign currency pushing its value downward.

The floating of the Birr was a step within a broader reform agenda negotiated and agreed with the International Monetary Fund (IMF) at liberalising the economy. The IMF has been urging Ethiopian authorities that liberalising the foreign exchange market, which it said overvalued the Birr by 52pc, was crucial to addressing chronic foreign currency shortages wreaking havoc on the economy. Yet, the immediate effect has been a steep drop in the Birr’s value as it adjusts to market forces, which had previously been kept in check under a managed exchange rate system.

Following the floating on July 29, 2024, banks quickly adapted their rates, reflecting the heightened uncertainty and risks in the current market. The Commercial Bank of Ethiopia (CBE), the largest state-owned bank, witnessed its selling rate rise from 111.98 Br on August 12 to 114.67 Br by August 17, a 2.4pc increase in six days. However, CBE's rate before the liberalisation was 95.67pc lower than it posted last week.