Prior to 1993, the official rate of the Ethiopian birr was pegged (fixed) to the U.S. dollar at US$1:Br5.000. Since a pegged exchange rate does not necessarily represent a currency's true market value, the EPRDF replaced the fixed exchange rate system with a floating exchange rate system. The value of the birr is thus determined in an inter-bank market where the national bank sells foreign currency to private banks, the Commercial Bank of Ethiopia, and large corporations at weekly auctions.
|Exchange rates: Ethiopia|
|birr (Br) per US$1|
|Note: Since May 1993, the birr market rate has been determined in an interbank market supported by weekly wholesale auction.|
|SOURCE: CIA World Factbook 2001 [ONLINE].|
In this way, the official exchange rate is auction-determined. The purchasers of foreign exchange, in turn, are free to establish their own exchange rates.
The value of the birr in relation to the U.S. dollar has steadily depreciated since the implementation of the floating exchange system. In 1995, for instance, the exchange rate was set at US$1:Br6.3200 while, 3 years later in 1998, the rate had decreased to US$1:Br7.5030. As of January 2000, the rate was determined at US$1:Br8.2.
According to the Country Commercial Guide 2000, the Ethiopian currency has remained relatively stable, especially in comparison to the currencies of most other sub-Saharan African nations, as a result of conservative monetary policies and considerable foreign exchange reserves . Nonetheless, the steady depreciation of the currency means that it takes a growing amount of Ethiopian birr to purchase imports from abroad. While this can help the export economy, since fewer U.S. dollars are needed to purchase Ethiopian exports, it also renders valuable imports, such as food for the population, more expensive. In 1998, incidentally, food imports constituted 14 percent of all merchandise imports.