Commentaries | May 25,2024
The Brewed Buck continued its steep decline against the U.S. Dollar last week, a slide that has accelerated since the National Bank of Ethiopia (NBE) liberalised the exchange market in late July. Despite multiple interventions, the currency remains unstable, prompting banks to widen the gap between buying and selling rates to hedge against further depreciation.
Spreads between buying and selling rates for the dollar now range from as low as 9.4pc to as high as 16pc, with many banks clustering between 10pc and 13pc.
Goh Bank (GohB) offered the most competitive spread last week at 9.4pc, buying dollars at 114.75 Br and selling them at 125.52 Br. Close behind was Brehan International Bank (BIB), with a spread of 9.7pc. On the opposite end, Awash Bank recorded the highest spread at 16pc, buying dollars at 108.55 Br and selling them at 125.88 Br.
The average spread across all banks stood at 12pc.
Banks like Lion Bank (LB) and Sinqe Bank (SIB) offered spreads of 10.7pc and 10.5pc, respectively. Dashen Bank and Cooperative Bank of Oromia (Coop Bank) presented spreads of 12.5pc and 12pc, respectively, while Oromia International Bank (OIB) and Hibret Bank (HB) had wider spreads at 13.3pc and 13pc, respectively.
These variations are influenced by market uncertainty. They represent periods of economic hardships and exchange rate volatility, compelling banks to widen their spreads to hedge against potential currency depreciation.
Over the past week, Birr has faced consistent pressure. The Dollar buying rate hovered at around 122 Br, while the selling rate fluctuated between 123 Br and 127 Br across major banks, revealing varied responses to the continued depreciation.
Bank of Abyssinia (BoA) emerged as the most competitive for customers seeking to sell dollars, maintaining the highest average buying rate. Its executives aggressively courted forex sellers to capture a larger share of the hard currency pool in a market plagued by shortages for years. By keeping their rates consistently higher than peers, they positioned their Bank as a more attractive option for converting dollars into Birr, a critical tactic given the acute dollar shortages affecting the broader economy.
The Coop Bank posted the lowest average buying rate among the six banks monitored last week, making it the least competitive option for customers selling dollars. Its executives may have adopted a conservative approach to managing forex reserves due to concerns over potential risks tied to the Brewed Buck’s ongoing depreciation. Lower buying rates could be attributed to a focus on safeguarding liquidity positions in an increasingly uncertain environment.
Dashen and Awash banks also posted relatively high average buying rates, with Dashen slightly edging out Awash. Their aggressive rates were likely designed to remain competitive during a time of rising demand for dollars from importers and general insecurity about the Brewed Buck’s long-term stability. While high, Awash Bank's buying rates trailed Dashen's by a narrow margin, indicating a balance between forex buying strategy and caution over the currency's depreciation.
The Commercial Bank of Ethiopia (CBE) and Nib International Bank (NIB) displayed more moderate rates. As the largest state-owned financial institution, the CBE exhibited a consistent pattern in its buying rates, signalling a preference for maintaining stability in foreign exchange operations. Its executive disclosed last week that they have availed over 282.4 million dollars to their clients.
The Bank's steadiness likely demonstrated its dominant market position and state backing, allowing executives to prioritise long-term stability over aggressive short-term competition.
Nib Bank, however, has seen slight fluctuations, with buying rates varying more than CBE’s, though still within a moderate range. These could be attributed to a more agile response to the shifting foreign exchange market, albeit without the aggressive competition seen at other banks.
On the selling side, banks have offered rates generally hover between 123 and 127 Br. Banks such as Dashen, Awash, and Coop Bank have been on the higher end of the spectrum, with selling rates approaching 127 Br.
Data from multiple banks revealed that the average buying rate for the U.S. dollar last week was approximately 112.64 Br, while the average selling rate was around 126.16 Br. These illustrated the widening gap between official and market rates, complicating efforts by monetary authorities to stabilise the Brewed Buck during rising inflation and low forex reserves.
A notable outlier was BIB, which posted the highest buying offers, reaching as high as 115.17 Br for a dollar on Saturday, October 12, although its selling rate was moderate at 126.39 Br. This premium compared to peers revealed a more aggressive strategy to attract foreign exchange or meet heightened demand for dollars in its operations.
The divergence between the highest and lowest exchange rates, spanning from 103.07 Br to 115.17 Br for buying and 115.43 Br to 127.65 Br for selling, signalled not only a lack of uniformity in foreign exchange market operations but also deeper concerns about volatility in the exchange market.
These rate differences can be attributed to factors including access to foreign currency, client base, and individual liquidity positions. Larger banks with diversified foreign exchange inflows may be better positioned to offer competitive rates, while smaller or more conservative banks may have focused on maintaining stability over competitiveness in the current market.
However, they also tell a story about the Central Bank's recent efforts to stabilise the Birr through tighter monetary policies, which have had limited success.
In an economy heavily reliant on imports, the depreciating Birr will likely exacerbate inflationary pressures, increasing the cost of imported goods and services while making debt servicing more burdensome. With foreign exchange reserves remaining a serious concern and the trade deficit widening, Central Bank Governor Mamo Mihretu faces mounting pressure to implement more effective measures to halt the Brewed Buck’s slide.
The divergent strategies among banks, from aggressive rate offerings to conservative liquidity management, manifested the complexities and uncertainties in the foreign exchange market.
PUBLISHED ON
Oct 13,2024 [ VOL
25 , NO
1276]
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