In a renewed effort to manage a widening currency gap and rein in the black market, the National Bank of Ethiopia (NBE) began holding biweekly foreign exchange (FX) auctions as of March 31, 2025. The initiative, the bank said, aims to funnel a portion of its foreign currency reserves into the private sector while advancing its monetary policy objectives.
The inaugural auction under the new schedule saw USD 50 million offered to commercial banks. According to an NBE statement issued on the same day, 12 banks secured allocations at a weighted average exchange rate of 131.7095 birr to the US dollar.
The move builds on earlier auction experiments launched in August 2024, which at the time were met with skepticism and uncertainty.
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“No one knew what to expect from the auctions back then, as they were still in their infancy and highly unpredictable,” said Abdulmenan Mohammed (PhD), a London-based financial analyst and economist. He noted that the central bank’s initial move appeared to have a tangible impact on the parallel market. “When the auctions began last year, the black market lost ground almost instantly—the pound-to-birr rate dropped by 10 birr in just one day.”
But that effect, he warned, has not been sustained. “The auctions that followed failed to achieve similar results,” Abdulmenan said. “The parallel market has surged ahead, and the auctions no longer had a weakening effect on the black market.”
He argues the response from the informal market suggests a lack of confidence in the central bank’s approach. “The injection is hardly enough to sway the market. If the national bank injects a significant amount of foreign currency, there’s no doubt the parallel market will weaken. But50 million dollars is a small amount.”
By January 2025, the pressure on the Birr had become pronounced. On the black market, the pound sterling climbed from 166 to 188.50 birr by early April—an increase of over 20 birr. The dollar, too, rose sharply, from 135 to 150 birr over the same period.
In contrast, the official exchange rate continues to hover between 120 and 130 birr, highlighting a widening chasm between formal and informal currency valuations.
The FX auctions, Abdulmenan suggested, may be more about providing consistent access to foreign currency for the business community than resolving the core issue. “They are trying to steer traders away from the black market,” he said. “But the scale of intervention remains inadequate.”
He further noted that even doubling the supply would yield limited results. “Suppose they inject USD 100 million every month—totalingUSD 600 million over half a year. That’s still insufficient to meaningfully address the country’s forex crunch or stabilize the parallel market.”
Beyond supply constraints, structural issues also feed into the thriving underground economy. Chief among them is Ethiopia’s closed capital account, which prevents individuals from legally transferring funds abroad or holding foreign bank accounts, Abdulmenan says.
“This discourages asset sales, since there’s no secure way to preserve the proceeds overseas,” Abdulmenan explained. “As a result, many turn to the black market, which facilitates informal capital flight.”
The flourishing parallel market, he said, is a predictable byproduct of such restrictions. “Unregulated exchange rates offer a premium over the official rate, and during times of political uncertainty, large volumes of capital flow through these channels.”
NBE’s FX Auctions Need Scale, Not Just Transparency
The central bank’s bi-weekly forex auctions could serve as a vital tool to weaken the black market—if it commits to supplying sufficient foreign exchange through official channels, experts say.
Dakito Alemu (PhD), a financial analyst, echoed concerns raised byAbdulmenan.
“The central bank’s move is a step in the right direction,” Dakito told The Reporter Magazine. “Its transparency can help restore public confidence in the formal system. But the real test lies in whether the supply matches market demand.”
Both analysts agree: the root of Ethiopia’s persistent parallel market problem is a chronic shortage of foreign currency within the formal financial system—especially at the central bank level.
“The NBE is offering limited amounts of forex, and much of it is sourced from external loans, including from the International Monetary Fund,” Abdulmenan said. “Unless the supply increases, the gap between the official and parallel markets will persist.”
For years, the country’s forex market has been undermined by black-market activity, where the birr trades far below the official rate. While the new auctions aim to inject liquidity into the formal system, the scale still remains too modest to shift long-standing dynamics. “If people can’t access foreign currency from banks, they’ll turn to the black market,” Abdulmenan said. “That fuels demand and drives up parallel market rates.”
He also pointed to liquidity constraints. “The government’s borrowing from the central bank has been sharply reduced, and a new law bans further borrowing altogether,” he said. “This limits how much liquidity the NBE can push into the economy.”
In an effort to curb inflation, the NBE has been withdrawing liquidity from commercial banks through open market operations, holding deposits until inflation falls below double digits. Still, Abdulmenan suggested the liquidity bottleneck could ease once interbank operations become more fluid. “Profitable banks will start lending to weaker ones, and that can ease the strain,” he said.
In a recent statement, the central bank highlighted improvements in the country’s balance of payments since the rollout of broad macroeconomic reforms in July 2024. Rising exports, increased remittances, and stronger capital inflows have helped boost the country’s foreign currency reserves, NBE said.
A key contributor to that reserve growth has been a surge in gold exports. As Ethiopia’s sole authorized gold exporter, the NBE reported receiving record-high deliveries in recent months, helping to bolster reserves beyond earlier projections.
Despite these gains, demand for imports remains high. Ethiopia continues to bring in essential goods such as fuel, medicines, machinery, spare parts, and vehicles. “Fuel prices, in particular, have seen recurring surges, and that trend is likely to continue,” Abdulmenan said, warning that import costs are contributing to a broader rise in the cost of living.
He also cautioned that the current official exchange rate—held well below black market levels—feels increasingly artificial. “If the gap keeps widening, remittances could be diverted from official channels, exporters may lose confidence, and foreign direct investment could stagnate,” he said.
Auctions Offer Glimmers of Hope, But Systemic Barriers Remain
Despite a renewed push to stabilize the foreign exchange market, the gap between official and parallel market rates remains stark. As of early April, while the official exchange rate for one US dollar stood at 131.50 birr, it was trading for 152.50 birr on the black market. The British pound sold for 169 birr in banks but fetched 187 birr informally. The euro, meanwhile, stood at 142 birr officially, compared to 164 birr on the parallel market.
A senior commercial bank executive, speaking on condition of anonymity, said the auction system has the potential to curb the influence of the informal market. “The NBE introduced this mechanism to stabilize the exchange rate and strengthen the birr’s purchasing power,” he noted.
Still, he warned that the central bank cannot play the role of primary forex supplier indefinitely. “If Ethiopia remains committed to a liberalized market system, then the NBE must pivot toward policymaking—creating conditions for increased foreign currency inflows—rather than spoon-feeding the market.”
He pointed to recent reforms by the NBE, including relaxed foreign exchange controls, simplified capital repatriation, and the removal of mandatory surrender requirements for exporters. “The central bank is repositioning itself as a regulator and supervisor rather than a liquidity provider,” he said.
According to the executive, even a hypothetical USD one billion injection from the central bank would not address core inefficiencies. “The market reacts disproportionately to small disruptions—sometimes fueled by the banks themselves,” he said. He cited past instances when buyers refused foreign currency offers despite only a 10 percent margin, exacerbating dependence on the parallel market.
Asked about interbank forex trading, he emphasized that the black market remains illegal and economically damaging. “Interbank transactions are the only legitimate path forward,” he said, adding that adequate supply in the official market would eliminate the need for informal alternatives.
Much of the problem, he suggested, stems from regulatory evasion. “Under-invoicing is rampant—importers often declare lower prices to skirt scrutiny, which helps funnel demand into the parallel market,” he said. The Ethiopian Customs Commission, he added, must be more aggressive in curbing such practices.
“Misinformation and market rumors also fuel black-market activity. Addressing supply shortages without tackling disinformation will not work,” he said.
Despite the constraints, the banker noted a silver lining: during a recent auction, the US dollar sold for 131 birr—a rate that caused a temporary dip in black market prices. “That’s a positive signal,” he said.
Policy Shifts Needed to Sustain Impact
Experts like Abdulmenan believe that forex auctions alone won’t resolve Ethiopia’s broader foreign currency woes. “Importers need to be discouraged at this stage, and exporters incentivized,” he advised. A peaceful environment and expanded domestic production, he added, are equally critical.
The foreign exchange crises that rocked many developing economies during the 1980s forced governments to rethink exchange rate regimes. One response, endorsed by the World Bank, was the introduction of foreign exchange auctions. These systems allow central banks to auction limited amounts of forex at market-determined rates—offering a more efficient alternative to fixed-rate regimes.According to the World Bank, forex auctions improve resource allocation, increase transparency, and better reflect market conditions.
Yet they are not without pitfalls.
Market manipulation remains a risk, as participants could collude to skew auction outcomes. In addition, access can be limited—especially for entities engaged in capital account transactions—raising questions about equity and competitiveness.
Auctions may also introduce volatility, particularly during sharp shifts in demand or supply, and require strong institutional oversight to ensure transparency and fair access.
The International Monetary Fund concurs. In countries with centralized forex allocation or underdeveloped financial markets, limited competition can hinder the transition to a fully liberalized exchange regime. Auctions, the IMF argues, are often a critical interim step on the path toward a market-based system.
A seminal 1993 study by economist Vicente Galbis, “Experience with Floating Interbank Exchange Rate Systems in Five Developing Economies,” emphasized that a foreign exchange market only functions when access to currency is broadened and competition is ensured. Galbis advocated for allowing non-bank dealers to operate alongside commercial banks—a reform he said would deepen the market, improve access, and reduce reliance on parallel systems.
