The International Monetary Fund (IMF) has increased Ethiopia’s net international reserves target to support the country’s ability to meet upcoming foreign currency obligations. This adjustment comes as part of Ethiopia’s ongoing $3.4 billion, four-year IMF financing program initiated in July, which followed a series of economic reforms, including the floating of its national currency, the birr.
Rationale for the Reserves Increase
Ethiopia’s recent reforms and economic vulnerabilities prompted the IMF to revise the short-term reserves target. The IMF highlighted “heightened uncertainty” in Ethiopia’s economic outlook as a key factor in the adjustment. In August, Ethiopia’s net international reserves reached $1.3 billion, more than double the target of $630 million, due to lower-than-anticipated currency sales through central bank auctions and an increase in gold exports.
To further bolster Ethiopia’s financial stability, the IMF raised the reserves target for June 2025 by $300 million to $400 million. This increase is aimed at helping the country cover fuel import-related bills from pre-reform letters of credit.
Impact of Birr Currency Flotation on Market Demand
The recent decision to float the birr led to an alignment of the official exchange rate with black market rates, addressing a long-standing issue of rate disparity. However, the currency adjustment hasn’t fully met demand for hard currency, as market activity has grown slower than initially anticipated, the IMF reported.
Debt Restructuring and Eurobond Negotiations
Ethiopia is actively seeking debt restructuring agreements, aiming to finalize a deal with bilateral creditors by the end of the year. Following this, the government plans to address its Eurobond obligations as soon as possible. However, negotiations with bondholders have encountered challenges. Bondholders opposed the suggested 18% reduction in principal, known as a “haircut,” arguing that Ethiopia faces liquidity constraints rather than insolvency.
The IMF commended Ethiopian authorities for their “good faith efforts” in working toward terms acceptable to Eurobond investors, reflecting ongoing dedication to securing financial stability.
This IMF-backed support and Ethiopia’s restructuring efforts underscore the government’s commitment to revitalizing its economy amid global financial pressures.
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