Commentaries | Dec 25,2018
The Birr's depreciation against the US dollar has notably accelerated over the past week, unfolding the economic impact of the central bank's decision to float the currency a month ago. Following the major policy shift, liberalising the foreign exchange market, the market has seen rapid fluctuations in exchange rates, with the Birr losing value steadily.
Between September 2 and 7, 2024, a downward trend was observed as the Birr weakened across both buying and selling rates. A comparative analysis of the exchange rates posted by 17 commercial banks revealed a depreciation pattern that, while consistent, saw varying levels of intensity among different banks. The most noteworthy movements can be traced to the policies driving a new market-driven approach to forex trading, with the central bank stepping back from previously rigid controls.
The higher selling rates last week signalled the unrelenting depreciation of the Birr relative to the dollar, which reflects the ongoing economic pressures such as inflation, demand for foreign currency, and broader economic adjustments. While minor, the fluctuations in rates across different banks indicated variations in institutional pricing, which could be driven by each bank's foreign currency reserves and their approach to managing supply and demand.
A dollar's six-day average buying rate was 109.26 Br, while the average selling rate was around 119.42.
Wegagen Bank (WEG) and Awash International Bank (AIB) recorded the highest average for buying the dollar during this period, posting around 115 Br. Berhan International Bank (BIB) and OIB posted the lowest average for buying, both of which hovered near 104.21 Br and 105.44 Br, respectively, throughout the six-day window. For selling, the highest rates were posted by OIB, reaching a peak of 123.93 Br on September 7, reflecting aggressive forex pricing strategies possibly sought to gain a competitive edge in this newly liberalised market.
Enat Bank (ENT) observed the lowest selling rates at an average of around 120.53 Br, slightly below the competitive benchmark set by larger banks.
The rapid shifts in the exchange rate can be tied directly to the federal government’s policy shift that floated the Birr in an attempt to ease pressure on the parallel market and attract remittances. Governor Mamo Mihretu attributed last week the narrowing gap between the official and parallel market rates to this policy change. However, the liberalised policy has opened the foreign exchange market to greater volatility as market forces, rather than official mandates, now determine the exchange rate.
Banks have responded variably to this new environment. Those with strong forex demand, such as Oromia International Bank (OIB), have seen outlier behaviour, with a notable divergence between buying and selling prices. OIB, in particular, posted one of the widest spreads at 15pc, three percentage points higher than the average last week, signalling the bank’s focus on forex trading for profit margins.
Another bank exhibiting outlier behaviour was Dashen Bank (DSH), which consistently posted spreads around 12.5pc, even as others trended lower, indicating an equally aggressive stance toward the market. This could reflect liquidity pressures or a calculated effort to position themselves as a market leader in the post-liberalisation market.
By contrast, Wegagen and Awash banks showed more conservative trading practices, with lower spreads of around 3.2pc to 3.7pc. These banks appear to have adopted a more moderate standing, likely positioning themselves to attract steady retail and corporate clients by maintaining more favourable exchange rates. Their behaviour reflects a cautious approach to the evolving market conditions, balancing profitability with customer retention.
Smaller institutions like Enat Bank have remained cautious, likely due to smaller forex reserves or a lack of capacity to compete with larger players in this high-risk, volatile environment. Enat Bank’s behaviour could reflect smaller banks' limitations in a liberalised forex market, where competitive pricing requires large reserves and strategic positioning.
The policy change has undoubtedly reshaped the market dynamics, but with the Birr continuing its slide against the US dollar, the central bank’s role in moderating future volatility will be crucial. As banks navigate this uncertain landscape, their forex trading strategies will likely become more aggressive, seeking to balance profitability with the need to maintain liquidity in the face of growing demand for foreign currency.
PUBLISHED ON
Sep 08,2024 [ VOL
25 , NO
1271]
Commentaries | Dec 25,2018
Fortune News | Sep 03,2022
Fortune News | Aug 19,2023
Agenda | Oct 01,2022
Fortune News | Apr 06,2019
Fortune News | Aug 16,2020
Fortune News | Feb 19,2022
Commentaries | Jul 13,2020
Fortune News | Jan 30,2021
Fortune News | Aug 05,2023
Aug 18 , 2024 . By AKSAH ITALO
Although predictable Yonas Zerihun's job in the ride-hailing service is not immune to...
Jul 13 , 2024 . By AKSAH ITALO
Investors who rely on tractors, trucks, and field vehicles for commuting, transportin...
Jul 13 , 2024 . By MUNIR SHEMSU
The cracks in Ethiopia's higher education system were laid bare during a synthesis re...
Jul 13 , 2024 . By AKSAH ITALO
Construction authorities have unveiled a price adjustment implementation manual for s...
Sep 14 , 2024
Successive regimes share a common legacy: a deep-seated commitment to education as a...
Sep 8 , 2024
Prime Minister Abiy Ahmed's (PhD) visit to China last week could mark a watershed mom...
Sep 1 , 2024
Addis Abeba's skyline is being dramatically altered. Once characterised by unremarkab...
Aug 25 , 2024
It may appear distasteful, unappealing and cumbersome to sight. But, the Addis Abeba...
Loading your updates...