The last couple of years have been tough for Tana Flora, one of the country’s largest exporters of fresh cut flowers. The widespread armed conflict surrounding its base of operations in Bahir Dar, Amhara Regional State, has created an unpredictable and dangerous business environment for the flower exporter.
Tana Flora has been forced to cut down the area of land it uses to grow its flowers by nearly half, currently managing 20 hectares as instability and security concerns keep its workforces from operating at full capacity.
The unrest in the region has also pushed up operational costs for the company.
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Tana Flora used to depend on trucks to transport its flowers from Bahir Dar to Addis Ababa, from where the product would be exported to clients in Europe. However, the ongoing instability has made road transport all but impossible, leaving the firm with no choice but to use air transport to get its perishable goods to the capital—an option that was previously reserved for peak market seasons such as Valentine’s Day or Mother’s Day.
The shift has raised Tana Flora’s transportation costs by 58 percent, according to Abenet Belayneh, deputy general manager.
The last couple of months have only added to the company’s woes as Ethiopia’s currency liberalization has given rise to an even more pressing issue for Tana Flora.
The government’s decision to allow banks to set exchange rates has resulted in, among other things, a significant spread between the buying and selling rates for major foreign currencies.
The wide spread has posed a serious threat to the company’s profitability.
Tana Flora must pay Ethiopian Airlines in US dollars to export its flowers to buyers in Europe. As the value of the Birr has plummeted, the cost of air cargo in terms of Birr has more than doubled, though the USD price for cargo transport remains the same.
While the increase in Birr revenue for their exports might offset this exchange rate fluctuation to some extent, the real problem lies in the huge gap between the USD buying and selling rates at commercial banks.
As of September 10, most banks were offering around 108 Birr for 1 USD, and selling the same for around 120 Birr. The spread is a new trend in the market, which had known differences of less than 1 Birr prior to the liberalization in July.
It comes at the expense of exporters like Tana Flora.
The company pays for cargo transport at the selling rate of 120 Birr, but when they receive payment for their exports, banks convert their USD at the much lower buying rate of around 108 Birr.
Abenet says the gap between the buying and selling rates is hurting the company’s margins.
“We are paying for cargo transport at the higher selling rate while being paid at the lower buying rate. This 10 percent to 12 percent spread is eating into our profits, and we are bearing the full burden of this gap,” he explained. “It is severely impacting our business, and if this gap isn’t narrowed, the future looks uncertain for us.”
The exchange rate spread issue is all the more pressing given Tana Flora’s struggle to minimize losses stemming from security risks and the ensuing transportation costs. Abenet worries the issue will persist as foreign currency remains in short supply.
“It will take time for the gap to narrow,” he said, expressing a pessimistic outlook for the near future.
His company is by no means the only one struggling with the widening spread between the buying and selling rates in the foreign exchange market. The trend has created significant challenges for exporters across the country, impacting their profitability and overall business operations.
Among those openly calling for a solution is Rahel Moges, founder and managing director of Ethiogreen Production & Industry Plc, and president of the Injera and Baltina Producers and Exporters Association.
She sees the growing difference between what exporters receive for foreign currency and what they have to pay to purchase it as devastating for their businesses.
“The spread between the buying and selling rates, sometimes as wide as 16 Birr, is putting immense pressure on us. It’s having a severe impact beyond imagination,” she said.
The gap is squeezing profit margins, leaving many exporters, especially those who need to buy foreign currency to import goods or pay for services in forex, struggling to maintain viability.
Ethiogreen, which has been in the business of producing and exporting injera for the past 12 years, now faces higher costs due to the exchange rate discrepancy. The company, which produces around 1 million pieces of injera annually, must pay for cargo transportation at the selling rate, which is significantly higher than the buying rate used by banks when converting export earnings into local currency. This disparity adds substantial costs that eat into the profits of exporters like Ethiogreen.
As part of the ongoing macroeconomic reforms, the National Bank of Ethiopia (NBE) has allowed exporters to retain 50 percent of their foreign exchange earnings, an increase from the previous 40 percent.
According to a new NBE directive, exporters are required to convert 50 percent of their earnings into Birr at a freely negotiated exchange rate through the bank that facilitated their transaction, while the remaining 50 percent can be held in a Foreign Exchange Retention Account. However, this retained foreign currency must be used or sold to the bank within 30 days, adding another layer of pressure on exporters.
Rahel and other exporters are urging the government and NBE regulators to extend the 30-day limit for retaining foreign currency. She argues that the current time frame limits their ability to negotiate with banks for better rates.
Exporters have already raised these concerns with government officials, who have indicated that they are considering the issue.
“We hope they will address the problem,” Rahel says.
Rahel wants to see exporters retain 100 percent of their foreign currency earnings. She argues that this move would incentivize exporters and give them greater bargaining power with banks, fostering more competitive pricing in the forex market. She foresees such a policy would encourage efficiency and competition among banks, leading to a healthier economic environment for exporters and boosting the overall export sector.
While the liberalization of the foreign exchange market was intended to bring greater flexibility, Rahel and other industry leaders argue that without further adjustments, the reforms are placing undue burdens on exporters, threatening their viabilities and even their survival.
The widening spread between the buying and selling rates of foreign currency is exacerbating the situation, severely impacting a range of industries, including textile exporters.
Hibret Lemma, CEO of the Hawassa Industrial Park Investors Association, notes that the current spread of 12 percent to 13 percent between the buying and selling rates means that exporters are forced to pay significantly more to buy back the USD they need for their operations.
“Banks are essentially taking your USD at the lower buying rate and selling it back at a premium, adding a hidden cost to manufacturing,” he explains.
Hibret observes this spread gap is severely affecting profit margins, making it particularly challenging for exporters. While manufacturers selling to the local market can sometimes pass on additional costs to consumers, those exporting internationally have fewer options, he explains.
The accumulation of these extra expenses puts Ethiopian exporters at a disadvantage in the global market.
Green Face Trading Plc, established in 2018, is one such company feeling the pressure.
The honey and beeswax exporter has been primarily shipping its products in bulk to Europe and the United States via sea freight. Recently, the company began adding value to its honey products by introducing enhanced packaging, glass jars, and new flavors such as coffee and fennel flower to target the US market. This value-added honey is transported by cargo planes to maximize its appeal to international consumers.
However, Joni Girma, the general manager of Green Face Trading Plc, is concerned that the rising spread between exchange rates may make the cost of cargo transport increasingly infeasible.
While the devaluation that followed the liberalization of the exchange market means exporters are receiving more Birr for their foreign currency earnings, Joni highlights that there are also significant downsides.
The widening exchange rate gap, combined with the increasing prices of products in the domestic market, often surpasses the rise in prices on international markets. This creates a difficult situation for exporters, who rely on competitive pricing to maintain their foothold in global markets.
Some exporters have begun to negotiate directly with banks to secure better prices for their foreign currency earnings. The new directive issued by the NBE allows exporters to freely negotiate exchange rates with banks, providing an opportunity to improve their margins.
Muhammed Hassan, an executive at Al-Mehdi Industries Plc, a textile exporting company, explains that many exporters are taking a firm stance during these negotiations, refusing to simply accept the rates offered by the banks.
He disclosed that some exporters have managed to secure what is referred to as the “middle rate”, a rate that falls between the bank’s buying and selling prices for foreign currency. This middle rate is effectively calculated by averaging the two, providing exporters with a more favorable exchange rate than the standard buying rate. While there is still a difference between the selling rate and the rate offered to exporters, Muhammed estimates that the gap is around 6 Birr per USD.
Although the current situation is challenging, Muhammed remains optimistic, expressing hope that the widening spread between buying and selling rates will eventually stabilize. He believes that as the market continues to adjust, the margin between these rates will shrink.
One of the key rationales behind the exchange market liberalization was to bridge the widening gap between the official exchange rate and the parallel market. Prior to the reform, the official exchange rate at banks was around 57 Birr per USD, while in the parallel market, the rate soared to approximately 118 Birr, a difference of over 51 percent.
However, while the gap between the official and parallel markets has narrowed, it has been replaced by a growing spread between the buying and selling rates at banks, which is now placing additional pressure on exporters.
Ayele Gelan (PhD), a research professor at the Kuwait Institute for Scientific Research, argues that the spread between the buying and selling rates should never exceed 5 percent. He suggests that aligning the selling rate with the parallel market rate would encourage everyone to sell foreign currency to banks, as a 5 percent margin would not be significant enough to drive people to the parallel market. Such a move, he asserts, would cause the parallel market to disappear over time.
Ayele observes the NBE’s policy of allowing commercial banks to impose punitive margins has created the largest spread between buying and selling rates in Africa. He urges regulators to take steps to reduce this gap, bringing the bank buying rate closer to the selling rate. This adjustment, he argues, would eliminate the need for a parallel market and make the floating exchange rate policy more effective.
Ayele observes that the inflated spread margin discourages people from selling their foreign currency to banks, which allows the parallel market to continue thriving. He suggests that the NBE should focus on narrowing the gap by increasing the buying rate to meet the parallel market rate, as this would incentivize individuals and exporters to supply hard currency to banks.
Fikadu Digafe, vice governor and chief economist at the NBE, argues that the spread between the buying and selling rates is determined by market forces of supply and demand, and therefore does not require central bank intervention. He explains that the essence of the recent exchange rate reform is to allow market-based pricing without interference from the central bank.
Fikadu says there will be no direct efforts to reduce the spread gap, aside from occasional auctions where foreign currency may be sold to banks.
The Vice Governor pointed to the new directive permitting exporters to negotiate directly with banks on the price at which they sell their foreign currency earnings, and expressed hopes that, over time, the market will naturally adjust, and the spread will narrow.
Fikadu emphasizes that the central bank’s role is now to facilitate a market-driven process rather than to control the rates directly.
However, Ayele cautions that if the existing gap persists, Ethiopia’s floating exchange rate will become irrelevant, and the policy will only fuel inflation while having negative impacts on other macroeconomic indicators. Ayele also criticizes the current policy requiring exporters to surrender 50 percent of their foreign exchange earnings to the NBE.
