Ethiopia initially fixed its currency to the USD, but after the coup in 1974 it adopted a high degree of central planning with the financial system subordinate to the plan. From 1991 it moved towards market economy arrangements, but maintained a reliance on public sector infrastructure investment as the key driver of growth. The exchange rate was heavily managed and frequently adjusted, financial liberalisation was limited, monetary policy relied on direct instruments, and monetary growth varied with sometimes large fiscal deficits.

YearsTargets and attainmentClassification
1974currency fixed to (but recently adjusted vs) USD; central bank relies on moral suasion to ensure banks’ adherence to credit guidelines, interest rates rarely changedaugmented exchange rate fix AERF
1975-90after coup in September 1974 currency is renamed and new notes issued but parity unchanged, central bank sets rates for commercial bank transactions; nationalisation and reorganisation of banking system, among other major institutional changes, with central bank having overall control of (two-tier) financial system; significant but not comprehensive central planning; 1977-78 hostilities in south-east and north; longstanding military conflict in Eritrea; rises in public spending tend to push up monetary growth but broad overall control; credit policy becomes more selective and growth-oriented, with decisions made in first instance by banks but subject to central bank approval; 1978 some tightening of exchange controls; 1980 two remaining commercial banks merged; 1984-5 drought and famine in some regions; “credit allocation accommodates the plan targets” (RED 1986); 1986 interest rates restructured; 1989 some wider liberalisationmultiple direct controls MDC
1991-2017government had announced 1990 intended shift from central planning to market economy, but real change starts with transitional government 1991; 1991 agreement on referendum in Eritrea leads to its independence in 1993; 1991-92 some trade liberalisation; 1992 large devaluation to unwind longstanding overvaluation, and more foreign exchange made available to private sector; 1993 bi-weekly forex auctions setting secondary exchange rate, while official rate adjusted at intervals from 1994, and parallel market volume and premium decline; 1991-94 shift of credit from government to nongovernment sector; 1994 interest rates revised, new law strengthens central bank autonomy and allows new locally-owned private financial institutions, seven new banks set up over next few years; 1995 treasury bill auctions; 1995 exchange rates unified, 1996 parallel premium narrows;  high excess liquidity in banking system reduced via treasury bill issues; 1998 interest rates liberalised, forex auctions reorganised; 1998-2000 border conflict with Eritrea hinders reform; 2001 plan for major financial sector changes, but problem of extreme market dominance of old, state-owned, inefficient commercial bank; wholesale forex auctions replaced by interbank market 2001, but rate remains closely managed vs USD (roughly a crawl plus periodic step changes); as of 2007 excess liquidity in banks precludes reliance on indirect monetary instruments; 2010 demonetisation, plus inflation and overvaluation, lead to desire for more active liquidity management and indirect instruments; 2011 credit ceilings abolished, direct central bank finance to government suspended temporarily and forex sold to reduce base money (which is now focus of monetary policy); banks required to hold central bank bills, funds onlent for infrastructure investments, with adverse effects on bank finances and lending to private sector, but authorities resist arguments for course change; monetary financing of budget deficits returns; large devaluation 2017 unwinds overvaluation but ensuing stabilisation of rate vs appreciating USD recreates it; continuing lack of secondary markets in government securities; statistical database has room for further improvementloosely structured discretion LSD

Selected IMF references: RED 1973 pp37-8, 63; SR 1975 pp1-3; RED 1977 pp35-8, 66-7; SR 1977 pp1-2, 6; RED 1981 pp22-3; RED 1983 pp30; SR 1984 pp6-7, 11-14, 18-19; RED 1986 pp28-29, 31; SR 1987 pp13, 17; RED 1990 pp21-2; SR 1990 p10; SR 1991 pp2,18; RED 1993 pp2-3, 21-5; RED 1994 pp49-52, 58-9, 66, 68-9; RED 1999 pp19-22; SR 1999 pp15-18; SR 2001 pp16-18; SR 2002 pp7, 9-10, 18, 20; SR 2004 p18; SR 2007 pp6, 8-10; SR 2010 pp12-14, 19; SR 2011 pp9-1; SR 2012 pp1-13 18; SR 2013 pp18-24; SR 2015 pp8-11; SR 2017 pp12-16; SR 2018 pp7, 14-15, 30-3.

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