Diverging Forex Rates Expose Liquidity Strains, Policy Inertia

Apr 13 , 2025.

The financial sector is experiencing sharp divisions among commercial banks as the Birr continues to depreciate rapidly against the U.S. Dollar. This widening gap reveals sharp differences between cautious established private banks, aggressive new entrants, and the conservative posturing of the state-owned Commercial Bank of Ethiopia (CBE).

The big five private banks — Awash, Abyssinia, Dashen, Wegagen, and Zemen — remain cautious players, deliberately avoiding crossing the psychological threshold of 129 Br for a dollar. Wegagen posted one cent short of this mark last week. According to market observers, these established financial institutions are carefully balancing competitive pricing with prudent risk management during market volatility. Their cautious approach contrasted with the assertive strategies younger, third-generation private banks adopted lately.

Last week's currency market displayed considerable disparities.

The Birr (Brewed Buck) saw accelerated depreciation against the U.S. Dollar (Green Buck) with considerable divergence in exchange rates offered by different banks. Notably, the CBE remained largely disconnected from prevailing market dynamics, offering the lowest buying rate at around 124 Br a dollar and a selling rate slightly above 126 Br, revealing a deliberate policy strategy to stabilise the currency artificially.

The persistent underpricing by CBE has sparked debate about its sustainability and the broader implications for foreign exchange market stability.

Emerging private banks, especially third-generation institutions like Amhara Bank, are pushing exchange rates higher. Amhara Bank consistently offered the highest buying rate at 131.55 Br a dollar last week, closely followed by Lion, ZamZam, Gadaa, Hijira, Tsedey, and Goh Betoch banks. This group collectively demonstrated a noteworthy shift toward aggressive pricing strategies, signalling intensified competition and liquidity stress in the economy.

The banking industry's average buying rate for the dollar settled at approximately 126.38 Br last week, revealing notable fragmentation. Selling rates hovered typically between 130 and 132 Br, further illustrating widening gaps compared to the state-owned CBE's benchmark. The divergence revealed underlying structural weaknesses and intensifying competition driven by persistent shortages in foreign exchange reserves.

From March 2018 to March 2025, the Birr depreciated by 78.86pc against the dollar, while in the same period, the dollar appreciated by 373.09pc relative to the Birr. Particularly striking would be the past year's rapid depreciation; from March 2024 to March 2025 alone, the Birr fell by 56.11pc, and the dollar concurrently rose by 127.86pc. Such drastic shifts unveiled mounting pressures within the financial system.

An unusual episode last week was the Oromia International Bank (OIB). It failed to update its buying and selling rates for cash notes on its website and digital platforms. The unexplained silence has raised transparency concerns. OIB's strategic non-engagement appeared deliberate but has provoked industry speculation about its intentions and the broader implications for market confidence.

Analysts are closely watching these developments, mindful of the risks deriving from aggressive market behaviors of third-generation banks, the cautious positions of established private banks, and CBE’s policy-backed currency pricing. Without timely regulatory interventions or harmonization efforts, these emerging divisions could threaten to destabilise the financial markets further, potentially undermining economic stability.

PUBLISHED ON Apr 13,2025 [ VOL 26 , NO 1302]