One year into its transition to a market-based exchange rate regime, the Ethiopian economy faces a pivotal period, navigating the intricate interplay between domestic reform efforts and a complex mix of international pressures and opportunities. This quarterly macroeconomic update for the first quarter of the 2025/26 Ethiopian Fiscal Year (July – September 2025) provides a critical assessment of this dynamic period, focusing on two crucial areas: the internal evolution of the foreign exchange market and the external forces shaping the nation’s economic stability.
The first section delves into exchange rate dynamics, with a specific focus on the Ethiopian Birr’s trajectory against the US Dollar. It analyzes the currency’s performance and movement during the quarter, examining whether the initial phase of intense adjustment has given way to a period of greater stability or new pressures have emerged. The analysis extends to the behavior of domestic commercial banks, assessing the persistence of disparities in buying and selling rates and the subsequent implications for market structure and business costs. A key area of focus remains the gap between the official and parallel markets, serving as a crucial barometer for the credibility of the reform and the underlying balance of foreign exchange supply and demand. Finally, the
analysis broadens to assess the Birr’s external competitiveness through the evolution of the real and nominal effective exchange rates, evaluating the profound implications of their sharp depreciation for the country’s trade balance and inflationary pressures.
The second section expands the lens to international economic developments, evaluating how external factors are influencing Ethiopia’s external balance and domestic economic stability. It assesses the impact of two critical global forces: fluctuations in key global commodity prices and divergent growth trends among Ethiopia’s primary trading partners. This analysis seeks to disentangle the domestic drivers of economic performance from those imposed by the international context, providing a nuanced understanding of the opportunities and risks present in the global arena.
Together, these analyses offer a comprehensive picture of the challenges and prospects facing Ethiopia’s economy. By linking internal market dynamics with the external environment, this report aims to provide policymakers and stakeholders with timely insights to navigate the ongoing reform process and bolster the country’s resilience against global economic currents.
