The Ethiopian Economics Association (EEA) has released a new working paper, WP 26, authored by Yetsedaw Emagne and Tadele Ferede, offering insights into Ethiopia’s transition to a market-determined foreign exchange rate policy aimed at reunifying official and parallel market rates. The paper highlights that the adoption of a floating exchange rate regime has significantly reduced the gap between the two rates, with the margin dropping to less than 10% by the third week of August 2024, compared to 98% before the policy’s announcement. Using a dynamic stochastic general equilibrium (DSGE) model, the authors evaluate two exchange rate adjustment scenarios: gradual adjustment and full reunification. Both scenarios are associated with economic contraction and inflation spikes, but the reunification scenario is deemed riskier, leading to more severe disruptions and slower recovery. The findings emphasize the need for careful and pragmatic management of the reform to mitigate potential economic challenges, providing valuable guidance for policymakers navigating Ethiopia’s exchange rate reforms.
