Ethiopia is entering one of the most difficult financial periods in its recent history as the birr continues to lose value at a pace never seen before. The rapid depreciation follows the government’s July 2024 decision to shift from a crawling-peg exchange rate system to a fully market-based regime under the Homegrown Economic Reform Agenda II. The reform aimed to close the wide gap between official and parallel market rates, restore credibility in the foreign-exchange system, and unlock long-delayed international financial support.
Once the reform took effect, the birr began to adjust sharply toward its true market value. The official exchange rate jumped from 56 birr per U.S. dollar to 83 birr within days. By October 2024, the rate had passed 100 birr/USD, and by November 2025 it exceeded 150 birr/USD. This represents a depreciation of more than 165 percent in just 15 months.
Rates outside the formal system deteriorated even faster. Authorized forex bureaus recently exchanged one dollar for 177 birr, while the parallel market approached 180 birr. With a maximum fall of over 216 percent since the policy change, Ethiopia’s currency adjustment is now one of the steepest global corrections in recent years.
A sharper fall than Nigeria and Sri Lanka
Countries that transition to market-determined exchange rates frequently face initial volatility, as seen in Nigeria and Sri Lanka. Nigeria’s naira depreciated by roughly 130 percent within 15 months of its 2023 liberalization, while Sri Lanka’s rupee fell by about 62 percent following its 2022 float.
Ethiopia’s depreciation, however, is far deeper. The shift took place during a period of limited foreign-exchange reserves, a strained fiscal environment, and broader economic pressures affecting households and businesses nationwide. The magnitude and speed of the depreciation surpass earlier Ethiopian devaluations in 1992, 2010, 2015 and 2019, making this episode historically significant and economically destabilizing.
Imported inflation emerges as the dominant risk
The exchange-rate reform has produced some gains for the external sector. Export revenues rose by 118 percent during the 2024/25 fiscal year, boosted by stronger earnings from gold and coffee. Overall foreign-exchange receipts reached $32 billion, up from $24 billion the previous year. The shift to a market-based rate also helped unlock concessional loans from the IMF and World Bank.
However, these improvements have been accompanied by mounting inflationary pressure. Ethiopia remains heavily dependent on imported fuel, fertilizer, machinery, pharmaceuticals and consumer goods. As the birr weakens, the cost of these imports rises rapidly, feeding directly into consumer prices.
This dynamic is driven by exchange-rate pass-through, the mechanism by which currency fluctuations become domestic inflation. Ethiopia’s $18.4 billion merchandise import bill, along with annual petroleum spending of nearly 197.5 billion birr, highlights how exposed the economy is to external price shocks.
The consequences are already visible in retail markets. The price of imported cooking oil has increased by more than 120 percent over the past year, while imported sugar has risen by over 150 percent. These trends closely reflect the birr’s depreciation, demonstrating how quickly currency changes translate into higher costs for households.
Rising production costs disrupt industry
Depreciation also affects domestic producers through higher prices for imported industrial inputs. Machinery, spare parts, chemicals and raw materials now require significantly more birr to purchase, raising production costs and pushing firms into difficult financial decisions.
Industries such as metal fabrication and leather processing have already reported sharp increases in input costs. As firms face shrinking margins, investment slows and employment becomes more vulnerable. These pressures threaten to weaken Ethiopia’s industrial expansion and limit progress in sectors vital to long-term economic transformation.
Low-income households face the deepest impact
The economic burden is falling most heavily on low-income Ethiopians, who spend the majority of their income on food and transportation. As imported inflation intensifies, households with little savings or assets face a direct decline in purchasing power.
The World Bank warns that poverty could rise to 43 percent by 2025, up from 33 percent in 2016. Urban residents, who rely heavily on market purchases for food, are experiencing the sharpest impact. Many rural households, despite agricultural activity, remain net food consumers and have also seen declining living standards.
Casual laborers, informal traders, female-headed households and displaced communities are particularly exposed, with limited capacity to absorb rising costs.
Stabilizing inflation becomes the urgent national priority
While Ethiopia’s transition to a market-determined exchange rate was necessary to correct deep structural distortions and secure international finance, the adjustment has produced severe short-term challenges. Imported inflation now represents the central macroeconomic risk facing the country.
Stabilization will require coordinated policy action, including tight monetary controls to curb excess liquidity, secure access to essential imports, expanded social-protection systems to shield vulnerable households, and targeted support for industries facing rising input costs. Strengthening domestic production of food and key industrial inputs will also be essential to reduce external dependence and moderate future inflation.
Ethiopia’s currency reform marks a decisive step in modernizing the economy. Its long-term benefits, however, will depend on the government’s ability to manage the immediate pressures, prevent a deeper decline in living standards, and protect the country’s path toward sustainable growth.