Citi Research indicated that Ethiopia's foreign currency reserves increased from around $3bn at the end of 2017 to $4.1bn at end-July 2018, mainly supported by a $1bn deposit from the UAE government and a $1.2bn disbursement from the World Bank. However, it noted that the improved reserve position has resulted in a modest change in the National Bank of Ethiopia's (NBE) exchange rate policy. It noted that the NBE allowed the Ethiopian birr to depreciate from ETB23.5 against the US dollar to ETB27 per dollar in October 2017, and has allowed a gradual depreciation since mid-2018 to the current level of ETB28 per dollar. Still, Citi considered that authorities should allow further currency depreciation to over ETB35 per US dollar in order to clear foreign currency backlogs. However, it noted that the Ethiopian government would be concerned about a significant pickup in inflation in the run up to the local elections in 2019, if the NBE allowed a substantial weakening of the currency. In this context, it said that Ethiopia already has consistently had a higher inflation rate than its southern neighbors in East Africa, with its inflation rate averaging around 9.9% annually in the 2014-18 period. It mainly attributed the inflation level to higher food prices, the ongoing foreign exchange shortages and high growth of money supply. Further, Citi indicated that the outlook on the birr is also contingent on the implementation of reforms in 2019 that include the privatization of state-owned enterprises, which could result in significant financial inflows and contain pressure on the currency.
Source: Citi Research