As Ethiopia grapples with a severe shortage of foreign exchange, the National Bank of Ethiopia has taken a critical step, allocating $175 million to the state-owned Ethiopian Petroleum Supply Enterprise (EPSE). This move, aimed at ensuring the country can meet its upcoming fuel import payments, is essential as the nation faces mounting pressure on its reserves and a soaring demand for hard currency. Ethiopia’s reliance on fuel imports, totaling nearly $4 billion annually, has significantly strained its already fragile economy, exacerbated by the ongoing dollar shortage.
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This allocation of foreign currency is part of Ethiopia’s broader strategy to stabilize its fuel supply and prevent further economic disruption. Prime Minister Abiy Ahmed had previously underscored the financial burden of the country’s fuel imports, making it clear that without significant measures, the country’s financial outlook could worsen.
The Burden of Fuel Imports on Ethiopia’s Economy
Fuel imports have long been a challenge for Ethiopia, Africa’s second most populous nation. Despite ongoing efforts to diversify the energy mix, fuel still represents a substantial portion of Ethiopia’s import bill. At approximately $4 billion annually, the cost of fuel imports poses a significant financial burden on the country’s economy, contributing to its persistent dollar shortage.
Ethiopia’s managed floating exchange rate system, in place for years, has been central to the foreign exchange crisis. As the local currency, the birr, remained overvalued for years, foreign exchange reserves dwindled, creating an acute shortage that hindered import payments, including those for essential commodities like fuel.
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In July 2024, the government made a bold decision to float the birr, which resulted in a nearly 50% devaluation. The depreciation brought the official exchange rate closer to the more realistic street market rate, effectively narrowing the gap between the two and incentivizing more foreign exchange to flow through official banking channels.
This devaluation has been a critical move for Ethiopia, helping to ease the dollar crunch and boosting reserves, although it has also brought inflationary pressures and raised concerns among consumers, particularly with regard to fuel prices.
International Monetary Support
Ethiopia’s current foreign exchange allocation for fuel imports has been complemented by international financial assistance. The country is set to receive $345 million from an International Monetary Fund (IMF) program, building on the $1 billion disbursement Ethiopia secured in July 2024. This funding is part of Ethiopia’s broader effort to raise over $10 billion from international sources, including the IMF and the World Bank, to help stabilize the economy, fund critical imports, and address its mounting debt.
The IMF funding, alongside the recent currency devaluation, is designed to support the Ethiopian government in its broader economic reforms, which include addressing the country’s foreign exchange crisis and restructuring its debt, a process that has been long overdue.
Addressing the Dollar Shortage
Ethiopia’s currency devaluation and the subsequent allocation of foreign exchange for fuel imports are part of broader efforts to address the dollar shortage. This shortage has not only affected imports of essential goods like fuel but has also hampered the ability of foreign investors to repatriate profits, creating uncertainty in the investment landscape.
One of the more innovative measures Ethiopia took to address the foreign exchange crisis came in August 2024, when the central bank held its first-ever special auction to bolster banks’ foreign exchange reserves. This auction marked a significant shift in the country’s monetary policy, demonstrating a willingness to adopt more market-driven mechanisms to manage the currency shortage.
The Impact of COVID-19 and Civil War
The foreign exchange crisis has been exacerbated by both the global pandemic and internal conflict. Ethiopia has faced increased financial difficulties due to the lingering effects of COVID-19, which severely disrupted economic activity and reduced foreign investment. Additionally, the two-year civil war, which ended in November 2022, devastated large parts of the country, further straining its economy and draining reserves.
The economic fallout from the war, including damage to infrastructure and displacement of millions of people, has increased Ethiopia’s reliance on foreign aid and exacerbated the need for foreign currency to rebuild and sustain its economy. In this context, the central bank’s decision to allocate $175 million for fuel imports is both a lifeline and a temporary measure to stabilize one of the country’s most essential sectors.
Future Outlook
Ethiopia’s foreign exchange crisis is far from over, but the measures taken in recent months—particularly the currency devaluation, IMF support, and strategic foreign exchange allocations—have begun to provide some relief. The government’s ability to manage the country’s fuel needs while also navigating the broader challenges of inflation, debt restructuring, and attracting foreign investment will be crucial in determining Ethiopia’s economic trajectory in the coming years.
In the short term, Ethiopia’s allocation of $175 million for fuel imports is a necessary step to prevent fuel shortages and the broader economic disruptions they could cause. However, long-term solutions, including the continued implementation of structural economic reforms and efforts to secure international financial assistance, will be vital for Ethiopia to achieve sustainable economic stability.
As Ethiopia moves forward, it must balance the immediate need to stabilize its economy with the longer-term goal of creating a more resilient, diversified economic foundation that can withstand future shocks. For now, the government’s strategic allocation of foreign exchange for fuel imports represents a crucial, if temporary, lifeline in the country’s ongoing struggle with its foreign exchange crisis.
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