Monetary authorities moved to show their firepower last week, floating a special foreign exchange auction on February 25, 2025, offering 60 million dollars to commercial banks.

“The auction followed a comprehensive macroeconomic reform program launched in July 2024, which has resulted in steady improvements in the balance of payments,” said the Central Bank in a statement a day before the auction. “Rising exports, remittances, and capital inflows have strengthened foreign exchange reserves, particularly through record-high gold supplies to the NBE.”

Monetary officials credit these inflows with driving up reserves “beyond expectations” but say they want to prevent excessive monetary expansion that could spark inflation. By selling part of their reserves through an auction, they sought to fine-tune liquidity and ensure that some available foreign exchange would reach private-sector hands. Yet, the ensuing depreciation proved the forex market remains under strain, despite the authorities’ efforts to strike a balance between promoting growth and keeping prices stable.

The second auction since August 7, 2024, immediately following the liberalisation of the forex market regime, the latest auction came during a broader effort by policymakers to stabilise the Birr (Brewed Buck). Its value against the Dollar (Green Buck) fell by about 2.1pc over the week, a pace that signalled a growing gap between demand and supply in the foreign exchange market. Close to 27 banks offered bids, and seven purchased 59.2 million dollars. The Central Bank disclosed a weighted average of 135.61 Br for a dollar.

In the days following the auction, the Birr stayed on a downward track against the dollar. From February 24 through March 1, the average buying rate among commercial banks rose from 125.4 Br to 128.1 Br, while the average selling rate climbed from around 127.8 Br to 130.6 Br. These daily shifts could say much about persistent forex demand, which appears to outweigh the supply injection from special auctions and ordinary monetary policy interventions.

The state-owned Commercial Bank of Ethiopia (CBE) stood out as an outlier within that market. It secured 40pc of the 60 million dollars auctioned on February 25, offering 135 Br for a dollar, yet it continued to post the lowest buying rate in its retail window at 124 Br. Analysts say the duality in its posturing showed the Bank’s dominant role in stabilising the foreign exchange market, coupled with a cautionary strategy to manage its liquidity. Despite acquiring a large chunk of dollars, the CBE seems intent on avoiding rapid adjustments to its official postings, perhaps to preserve reserves or meet internal constraints.