Birr (Brewed Buck) has been charting a steady course of depreciation against the Green Buck (U.S. Dollar) over six days beginning January 27, 2025. Although the rates across the banking industry generally convey a shared sense of gradual weakening, subtle divergences have emerged that hint at distinct strategies for coping with mounting pressures in the foreign exchange market.
Some banks appear intent on managing depreciation carefully and staying below the psychologically important mark. Others, seemingly in step with a market-driven position, are more willing to cross this threshold. For most of the week, large private banks such as Dashen, Awash, Abyssinia, and Wegagen appeared united in their resolve to post buying rates under this threshold. Yet, at a few banks, including Tsehay, Goh, Gadaa, and ZamZam, buying rates have comfortably exceeded 125 Br for several consecutive weeks, echoing a more aggressive posture.
The National Bank of Ethiopia (NBE) also stepped over the barrier, a shift from its traditional role in damping volatility. By contrast, the state-owned Commercial Bank of Ethiopia (CBE) maintained lower rates, cementing its capacity to act as a stabilising force when erratic market behaviour could trigger sharper swings.
Dashen Bank’s reluctance to cross 125 Br, missing the mark by a mere 0.04 cents, encapsulates the balancing act many private banks are trying to pull off. There appears to be an acknowledgement that the Birr remains under pressure due to inflationary trends, geopolitical tensions, and persistent trade imbalances pushing the Brewed Buck southward. Banks are wary of moving too quickly, a decision that could exacerbate inflation, hurt consumer confidence, and invite stricter regulatory scrutiny.
According to observers, this collective caution, however subtle, signals that the banking community recognises the fragility of the market and the importance of tempering a freefall.
Not all banks share that viewpoint, though.
Tsehay, Goh, Gadaa, and ZamZam have gone well past 125 Br, leading analysts to speculate that these smaller private players see an advantage in getting ahead of a depreciation predicted to continue in the medium term. A higher buy rate can help attract more foreign currency, particularly from remittances or exports, and position these banks to meet local demand or strategise around short-term currency spikes.
The NBE’s decision to cross the threshold has attracted particular attention. Long perceived as the authority guiding the market from behind the scenes, the Central Bank has typically held rates below the average to restrain sudden price hikes and inflationary ripples. Its new posture implies a more deliberate effort to keep the official market with real demand and supply, though sceptics warn that this approach risks fueling inflation if the Birr’s decline accelerates.
Throughout last week, the selling rate moved in parallel with the buying rate, further confirming Birr’s downward bias. The average buying rate was 124.86 Br, while the selling rate averaged 127.61 Br.
Commercial Bank of Ethiopia (CBE), by virtue of its state-owned status and sheer market heft, has often functioned as a buffer during currency instability. Its conservative pricing has signalled steadiness and held down the more aggressive manoeuvres from smaller banks. In the absence of the CBE’s moderating force, the Breweed Buck might have depreciated more sharply, with banks’ competing tendencies to outbid each other pushing the currency lower at a faster rate.
Broader macroeconomic conditions appear to support the view that the Birr could weaken further in the coming months. Ethiopia’s import-driven economy, coupled with lower foreign exchange earnings from key export sectors, has heightened demand for hard currency. Political uncertainties and the rising cost of living, fuelled by imported fuel prices, pressure external balances. In this environment, banks adopting the more aggressive forex valuation strategy may see their position validated, though they equally risk regulatory pushback if authorities deem the pace of depreciation excessive.
Over the past three quarters of 2023/24, the foreign exchange market’s dynamics offer clues.
Total forex purchases by commercial banks declined from 63.51 million dollars in the third quarter to 54.62 million dollars in the fourth quarter, translating to a 14pc drop. Despite this quarter-on-quarter contraction, overall purchases still stood 16.6pc higher than in the same quarter of the previous fiscal year, demonstrating the underlying demand for foreign currency even during the slowdown. However, aggregate forex sales decreased by 13.9pc compared to the preceding quarter and dipped by 1.2pc against the same period a year earlier, a retrenchment in supply.
The CBE once again looms large. It bought 48.11 million dollars in the fourth quarter, representing a 12.3pc decline from the preceding quarter but still nearly a quarter higher than its year-ago level of 39.19 million dollars. On the sales side, the Bank’s performance jumped 13.8pc quarter on quarter to about 47.84 million dollars, marking a substantial 24.3pc increase compared to a year earlier. This dual dominance in purchases and sales positions the CBE as the single most consequential actor in the forex market, with the potential to dampen or amplify broader market trends based on its pricing strategies.
Beyond the state-owned giant, mid-tier banks exhibited marked fluctuations.
Wegagen Bank’s purchase volume soared to 231.4 million dollars from 61 million a year earlier, a striking 279.2pc surge. Yet during that same period, its sales volume dropped 69.9pc quarter on quarter, displaying the uneven shifts that can occur from one reporting interval to another. Bank of Abyssinia similarly experienced notable declines, with a 58.3pc drop in purchase levels from a year ago and a quarter-on-quarter sales decline of over 50pc.
Among newer market entrants, banks such as ZamZam and Gohe Betoch posted smaller transaction sizes overall. However, they occasionally registered triple-digit percentage changes when measured against a low base, a sign that smaller players can shift quickly to capitalise on shifting short-term liquidity conditions. While the ongoing transition toward a floating exchange rate regime continues to dictate much of this volatility, a trend toward consolidation rather than aggressive expansion is evident. Many banks appear to focus on balancing liquidity requirements and regulatory constraints, leaving only a few positioned for high-risk or high-reward strategies.
Even so, the fundamental demand for foreign currency remains strong, pointing to durable pressures on the Birr. The year-on-year uptick in overall purchases indicates that businesses and individuals are still in need of buying foreign exchange despite week-to-week or quarter-to-quarter fluctuations. Banks that have seized on opportunities arising from short-term supply swings, whether driven by political events, holiday inflows, or policy shifts, have generally witnessed more robust growth, at least in the near term.
Set against this broader economic backdrop, the six-day forex trend spotlights a currency on a seemingly irreversible slide. The question facing policymakers and bank executives is whether to let the Brewed Buck continue its downward drift or to invoke additional measures to steer it toward a new equilibrium. Some industry observers believe it is only a matter of time before all banks accept the 125 Br barrier as the new normal, pushing rates beyond that level and adapting to the associated inflationary effects.
PUBLISHED ON
Feb 01,2025 [ VOL
25 , NO
1292]
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