Unpopular Opinion: Floating the Birr is a right call

Now don't get me wrong - I am no fan of Abiy and even lean on "this guy is a CUNT" political spectrum wise. That said, floating the ETB was definitely the right call and long overdue.

The difference between the official rate and the black-market rate had gone mad to the point where the official rate was deemed irrelevant. I recall attending a meeting chaired by the former governor (Yinager Dessie) where he confessed that NBE had no idea how the economy was running.

In his words, he said the only commodities that are imported using the official FX rate at that time were fuel, fertilizer, and medicine. The rest FX goes to debt repayment. He said every commodity we see in supermarkets, shops, boutiques, and I mean EVERYTHING, was imported via the parallel market. I recall the value being US$ 18 bln for 2022-2023.

So, if the economy is already operating on the so-called black-market rate and has made the official rate irrelevant, what is the point of keeping it? It literally makes no sense.

The second argument is that inflation will soar due to the flotation. This is highly unlikely given the comprehensive nature of the policy change, as well as the guard rails the govt has put in place.

First, the govt will get major FX injection from IMF to ease the transition. I have read this to be around 12.3 bln USD

Second, the govt will not engage in quantitative easing, i.e. print money. If the supply of birr remains the same or even decrease with NBE pulling money out of circulation while major FX inflow is happening simultaneously, the parallel market will be forced to keep the current price or even go down.

OfCourse the first few weeks will be unpredictable as all actors react differently. However, if they manage it right, this move will might just be what will stabilize the economy.