The National Bank of Ethiopia (NBE) has injected $625 million into the domestic banking system over a nine-day period, yet the surge in supply has failed to eliminate the country’s acute shortage of foreign exchange.
The central bank quadrupled its dollar supply during the window, mopping up a corresponding amount of local currency to maintain monetary stability. Despite this aggressive intervention, the demand for hard currency continues to outrun every dollar offered by the NBE.
The situation comes as Ethiopia struggles to stabilise its economy following the July 2024 decision to float the Birr. This policy shift, a key condition of a financing package from the International Monetary Fund (IMF) and the World Bank, aimed to eliminate the distortions of a fixed exchange rate and curb the thriving black market.
By allowing the market to determine the value of the Birr, the government intended to attract foreign direct investment and streamline the process for importers to access the dollars needed for essential goods. However, the transition has revealed the sheer scale of the currency backlog.
Bank officials report that the current shortage is driven by a combination of pent-up demand and the urgent need for imports such as fuel, medicine, and industrial raw materials. For years, importers operated under a priority system that left many businesses in queues for months or years to secure small allocations of hard currency.
The NBE’s recent attempt to flood the market with $625 million was intended to signal a new era of liquidity. Instead, it highlighted a deeper structural imbalance where the volume of available dollars, even when quadrupled, cannot satisfy the immediate requirements of the private sector.
Structural Constraints Limit Exchange Market Recovery
The inability of a $625 million injection to close the gap points to the precarious state of Ethiopia’s reserves and the volatility of its new market-based system. Market analysts suggest that while the NBE is attempting to manage the transition, the sheer volume of arrears and the lack of confidence among some commercial actors have led to continued hoarding of dollars.
The Africa Report indicates that the central bank’s strategy of mopping up local currency is designed to prevent the float from triggering runaway inflation. By withdrawing Birr from the system as it sells dollars, the NBE hopes to keep the domestic money supply in check while attempting to satisfy the FX hunger.
This balancing act is complicated by the country’s debt obligations and the requirement to maintain a minimum level of international reserves. The IMF’s Extended Credit Facility (ECF) provides a framework for these reforms, but the immediate pain felt by businesses importing critical inputs remains severe.
Commercial banks have expressed concerns that the current pace of dollar supply is insufficient to clear the backlog of import requests. This has left many SMEs and manufacturers unable to secure the raw materials necessary to maintain production, threatening to stifle the very economic growth the reforms are meant to foster.
Furthermore, the volatility of the Birr since the float has made pricing difficult for local businesses, many of whom are passing the increased cost of imports onto consumers, contributing to domestic inflationary pressures.
The NBE is expected to continue its interventions as it monitors the impact of the float. The long-term success of the policy depends on whether the market-determined rate becomes attractive enough to encourage exporters to repatriate their earnings and entice foreign investors to bring in new capital.
The government’s next critical milestone will be the upcoming review of its program with the World Bank and IMF, where the effectiveness of the currency float and the stability of the banking system will be under intense scrutiny.
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