Viewpoints | Apr 22,2023
The Birr experienced extraordinary but understandable volatility last week, reflecting broader government monetary policy changes. Between August 5 and 10, 2024, the currency saw a steep decline against the US dollar as the authorities implemented decisive measures to liberalise its foreign exchange market. This culminated in the anticipated decision to allow the currency's value to float.
Market watchers have been closely monitoring Birr's exchange rates, particularly rates posted by commercial banks such as the state-owned Commercial Bank of Ethiopia (CBE), Dashen Bank (DSH), Bank of Abyssinia (BoA) and Awash Bank (AIB). Each bank has reported buying rates around the 100 Br mark, yet the value of the Birr has been gradually deteriorating over time.
The selling rates presented a similar picture, generally fluctuating between 101 and 115 Br, with marginal spread percentages indicating a controlled market environment.
The most pressing concern, however, lies with the National Bank of Ethiopia (NBE), whose Governor, Mamo Mihretu, is under intense pressure to ensure stability. The trajectory of the Birr appears precarious, with the potential for increased volatility looming. The currency's ongoing decline against the dollar and its fluctuating exchange rates serve as clear indicators of this instability.
A notable shift occurred on August 7, when the central bank held a “special” auction designed to reach a price discovery of Birr's value against a basket of major currencies, resulting in immediate depreciation. The uncertainty was reflected across the banks.
By August 10, the buying rates of the Birr had surpassed the 100 mark at several banks, and the spread between buying and selling rates had stabilised albeit at elevated levels.
A key illustration of this trend is Global Bank, which commenced the week with a rate of 107.11 Br for a dollar and concluded at 112.47 Birr, marking a five percent depreciation. Similar depreciation patterns were evident at other commercial banks, including Wegagen, Enat, and Tsehay Bank, with depreciation rates of 12pc, 11%, and 14pc, respectively.
Over the week, the average rates across 17 commercial banks, including the state-owned CBE, were 100.61 Br for buying and 112.04 Br for selling. These figures depict a concerning scenario for a currency under severe strain, a manifestation of a widening trade deficit, limited foreign exchange reserves, and persistent inflation.
To alleviate some of this pressure, the Central Bank conducted a mid-week auction, posting a weighted average rate of 107.9 Br a dollar. However, market reactions indicate limited confidence in the Birr's recovery.
Various factors are driving concerns over further depreciation. The growing gap between the official rate and the parallel market exchange rate, which often serves as a benchmark for the official rate, may compel the market to adjust the official rate downward. Global market conditions and the strengthening US dollar, pushed by robust US economic data, exert further pressure.
While the authorities see their decision to float the Birr as necessary to address chronic foreign exchange shortages and misaligned currency values, it is likely to lead to further depreciation in the short term. Based on current trends, the Birr could devalue to approximately 105 on the buying side and up to 117 on the selling side by mid-August, particularly if market sentiment remains bearish and external pressures, such as a strong global dollar, persist.
Ultimately, the extent of this depreciation will largely depend on the actions of Governor Mamo. Should he choose a more proactive approach, including a large injection of foreign reserves to demonstrate the Central Bank’s firepower or a tightening monetary policy, the Birr may experience short-term stability. However, this could merely defer the inevitable, as the underlying economic fundamentals continue to exhibit weakness.
For investors and businesses, the forthcoming week will likely require heightened vigilance. Strategies may need to be adjusted, and contingency plans prepared for potential escalations in exchange rate volatility. For the average Ethiopian, a weaker Birr may translate into higher prices for imported goods and rising inflation, further diminishing purchasing power.
PUBLISHED ON
Aug 11,2024 [ VOL
25 , NO
1267]
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