Ethiopia’s Birr Float Leaves Black Market Gasping for Cash

Ethiopia's black market for foreign currency has been in turmoil following the government's decision to float the birr last week, leading to a sharp depreciation of the local currency.

Traders operating in the parallel market say the birr has been highly volatile, with the dollar rate surging from 112 birr to 125 birr by the end of this week before declining again to 115 birr as dealers face challenges in obtaining sufficient cash.

"The black market rate is really fluctuating as the cash shortage hits the dealers hard," said one currency trader in the capital Addis Ababa, who asked not to be named. "We are finding it increasingly difficult to access cash to buy hard currencies, leading to these wild swings."

The cash shortage was initially triggered by previous gov't measures limiting bank lending growth, leaving informal dealers without sufficient liquidity to navigate the bedlam of the parallel market.

According to renowned consultant and policy analyst Henok Assefa, banks are now calling their clients to offer letters of credit (LCs), but many are being turned down.

"Banks are calling to offer LCs to their clients and they are being told 'No, you are too expensive'. Or 'Wait, let me speak to my other bank, and I will get back to you'," Assefa posted on X (formerly Twitter).

Henok noted that Ethiopia is transitioning from a dollar scarcity to a birr scarcity, in a significant way. He suggested that the unthinkable may be about to happen - the official birr exchange rate may appreciate at the National Bank of Ethiopia (NBE) auction, which could even influence the black market rate lower.

The floating of the birr is seen as a long-term solution for the foreign exchange crunch in Ethiopia, with the official exchange rate now significantly weaker than the previous tightly controlled regime.

Experts say the currency float is a necessary reform, but the rapid and volatile depreciation of the birr is causing significant disruption in the short-term.