August 13, 2021

Exchange rate at the official and parallel markets widened rapidly

City: Addis AbabaEconomy

Conflict and instability in Northern and other parts of Ethiopia are factors that are said to have an effect on the exchange rate of foreign currency.

Avatar: Solomon Yimer
By Solomon Yimer

Solomon is a content editor at Addis Zeybe. He has worked in print and web journalism for six years.

Exchange rate at the official and parallel markets widened rapidly

Yosef Taye, whose name has been changed for security reasons, has been involved in Addis Ababa's parallel foreign currency market for about a decade. 

“Over the past years everything has been changing so fast, exchange rates are rapidly fluctuating due to the political uncertainty in the country,” Yosef told Addis Zeybe.

“As the business is so sensitive, we are closely following new developments in the country daily including, new directives from the national bank, the political situation, the trade, and even the geopolitics,” he said.

Three years ago, when the homegrown economic reform agenda was announced, the gap between the official and black market exchange rates for birr was narrow.  The birr was trading on the parallel market around 28 to the dollar, close to parity with the official rate and 25%.

We asked Yosef the exact amount he can pay for a dollar during our meeting in a small coffee shop in Addis Ababa, on Wednesday, August 5, 2021, around 4:00 PM.

He sipped his coffee and responded, “ I can buy a dollar for 70 birrs now, but don’t expect this price after tomorrow, even after hours.”

"Due to the increased demand for currencies this week, the dollar exchange rate at the parallel market skyrocketed," he added.

With the rising demand for foreign currency, the exchange rate gap between the official and black markets went up to 48 percent in some areas of Addis Ababa.

A week before, the difference between the official and the black market was about 28%.

According to sources, Addis Ababa, Adama, and Hawassa are among the cities where exchange rates for hard currencies, including Euro, showed an unprecedented increase during that period.

However, things do not seem constant as Yosef said, when Addis Zeybe called him a week after, to ask him about the amount of dollar exchange rate in the parallel market he said it is fluctuated between 60 to 62 birr, while the dollar is exchanged between the official 44.9 to 45.1 in the official rate.

“Though the exchange rate seems to be declined as compared to last week, it is still high compared to previous months,” Yosef told Addis Zeybe. 

For instance, the official exchange rate was approximately 40.81 Ethiopian Birr to the U.S. dollar in  March 2021, while the parallel market exchange rate for the same time was approximately 52 Ethiopian birr.

The conflict in Northern Ethiopia and the instability in most parts of the country are among the factors that are said to have contributed to the skyrocketing exchange rate of foreign currency.

When the banks are not capable enough to provide the foreign currency, it is usual that the rates in the parallel market are rising” As a result, people are more likely to be attracted to the black market, according to financial experts,

The Ethiopian government is struggling to control the black market currency exchange, but the effort is unsuccessful.  

Weeks before, Federal police said that the TPLF, which has been designated as a terrorist group by the parliament, was using the network, businesses, and other foreign funds to smuggle money out of the country as a source of funding for the group.

According to the expert, the main reason for the current shortage of dollars and the sharp rise in dollar rates is that individuals are smuggling money out of the country. As a result, the dollar is in high demand at this time of year, he said.

The instability has contributed to the rise of the dollar in the black market, he added.

During such times, where instability hits a nation, it is not only the politics that is a playground for actors, economic sabotage is also there. When there is instability, there is a high tendency that people would try to smuggle the cash in hard currencies out of the country, the expert said.

In the same statement, Federal police said they were investigating 11 individuals involved in the crime, including six international money transfer agents, and more than 100 bank accounts with 10.2 million birr deposited in 14 banks.

According to the expert, controlling the illegal foreign exchange trade is challenging.

“Removing the brokers involved in the currency market, establishing strong monitoring and controlling schemes, which could help achieve results in a short period of time, should be put into place,” he said.

One of the effects of the highly regulated currency exchange rate is the expansion of thriving black market exchange expansion In Ethiopia’s case, the black market exchange rate is growing faster than what the government is providing through legal channels.

Over the past ten years, the Ethiopian birr has depreciated significantly against the U.S. dollar, primarily through a series of controlled steps, including a 20%devaluation in September 2010 and a 15%devaluation in October 2017.

Since November of 2019, the NBE has been silently depreciating   Ethiopian birr. Until the third quarter of the last fiscal year, birr was depreciated by 19%.