Import-dependent enterprises in Ethiopia are facing mounting working-capital pressures and price uncertainty following sweeping macroeconomic and foreign-exchange reforms aimed at transitioning the country toward a more market-driven economy.
While the policy shifts are intended to support long-term economic stability, improve transparency and attract foreign direct investment, commercial sectors that rely on imported inputs are experiencing immediate operational disruptions, according to economists and sector experts.
The reforms began in earnest with the National Bank of Ethiopia’s revised foreign-exchange framework in July 2024, marking a departure from years of administrative currency allocation and a tightly managed exchange-rate regime.
Berhanu Denu, an Economist at Addis Ababa University
Under the previous framework, the central bank regulated the distribution of foreign currency and kept the Ethiopian birr within controlled trading bands. However, persistent structural imbalances—including a balance-of-payments deficit, rising external debt and an overvalued currency—prompted a broader market adjustment supported by international financial institutions, including the World Bank and the International Monetary Fund.
Speaking on findings from policy research conducted through a joint collaboration between the Center for International Private Enterprise (CIPE) and the Forum for Social Studies (FSS), Berhanu Denu, an economist at Addis Ababa University, said the official exchange rate adjusted rapidly after the birr was floated.
The birr, which traded between 43 and 47 per US dollar before the reforms, moved to more than 82 per dollar within a month of liberalisation and later approached 160 per dollar. While the changes were intended to narrow the gap between the official and parallel-market exchange rates, the adjustment significantly altered input-pricing models for domestic firms.
Berhanu said the main effect on businesses has been increased costs for imported raw materials, machinery and intermediate goods. Companies that had based their financial planning and pricing on the previous exchange-rate system have struggled to absorb the higher acquisition costs.
Field assessments examining the operational effects of the reforms indicate that manufacturers and small and medium-sized enterprises are responding differently. Many firms have attempted to pass higher input costs on to consumers, with some transferring up to 60 per cent of the increase in costs to retail prices, adding to domestic inflationary pressures.
Tilahun Girma, Economist
For small and medium-sized enterprises, the challenges are compounded by liquidity constraints and strict collateral requirements imposed by banks.
Central-bank regulations have expanded foreign-exchange retention rights for exporters, allowing service exporters to retain up to 100 per cent of their foreign-currency earnings. The National Bank has also capped transaction commissions at 1.5 per cent. However, non-exporting importers remain dependent on commercial-bank allocations and trade-finance facilities.
Access to foreign exchange remains linked to commercial banking relationships, documentation requirements and sector-specific priority lists. Smaller firms often face delayed or inadequate allocations, tying up working capital and disrupting production cycles.
Despite the immediate pressures, analysts argue that the reforms could produce important long-term benefits by improving price discovery, transparency and confidence in the financial system.
Under the new framework, the National Bank publishes indicative daily exchange rates based on market transactions, providing businesses with clearer information on currency conditions.
However, experts at a recent financial forum said monetary reforms alone would not resolve Ethiopia’s overlapping economic vulnerabilities. They argued that the country must also address structural constraints affecting exports, domestic production, access to finance and competitiveness.
Although export earnings from commodities such as gold and coffee have grown, Ethiopia remains heavily dependent on imported fuel, fertiliser, machinery and industrial inputs. Higher global prices for these goods have added to imported inflation, increasing costs for households and businesses.
The rise in raw-material prices has also raised daily working-capital needs for domestic manufacturers, preventing some from operating at full capacity. Government policy is increasingly focused on domestic production and import substitution as ways to reduce exposure to external price and currency shocks.
At the same time, the liberalisation of the banking sector and Ethiopia’s bid to join the World Trade Organization are expected to reshape the financial industry.
Opening the domestic market to foreign banks could increase competition, introduce modern financial technologies and reduce transaction costs for corporate clients, according to analysts.
Tilahun Girma, an economist, said concerns about foreign-bank entry have often been overstated. He noted that large global institutions, including Citibank, derive only a limited share of their revenue from Africa and often maintain a regional presence through representative offices.
He said the institutions expressing interest in Ethiopia are largely regional East African banks, creating pressure on domestic lenders to improve technology, customer service and operational capacity.
Tilahun added that the National Bank has started using open-market operations to manage liquidity. Recent reforms have also allowed major lenders, including the Commercial Bank of Ethiopia, to direct more than 70 per cent of their credit portfolios toward the private sector.
The introduction of Basel III guidelines further requires banks to issue credit in proportion to their capital base, a measure intended to strengthen financial stability and reduce systemic risk.
