The start of the new year has injected a sense of optimism into the banking industry, driven by expectations of increased remittance inflows and the promise of reforms liberalising the foreign exchange market. Commercial banks, long starved of foreign currency, now see the potential for securing much-needed hard currency, a development that could impact their operations.

At the Sky-Light Hotel last week, the atmosphere was charged with anticipation as bankers gathered to display their enhanced remittance services to Mamo Mihretu, governor of the National Bank of Ethiopia (NBE). Tables were set with brochures and digital displays, designed to impress. Bank executives eagerly awaited their opportunity to showcase their financial performance and services.

Oromia Bank was one of these; its President, Teferi Mekonnen, enthusiastically spoke about his bank’s evolving services and financial offerings. According to Teferi, improvements in deposits and liquidity were prompted by reforms that had redirected the flow of remittances from the parallel market.

“They're speculating,” said Teferi, referring to people still reluctant to convert their forex, waiting to see if the Birr would depreciate further.

The Birr has depreciated by over 100pc against the U.S. dollar, particularly in the days following the central bank’s decision to float the currency in July 2024. As part of a broader economic policy reform agreed with the IMF, the liberalisation of the forex market was intended to close the gap in the value of the Birr between the official and parallel markets. The authorities believe the value of the Birr, free from distortions and speculations, could boost exports and attract foreign direct investments (FDI).

The authorities also hoped remittances and other transfers from non-governmental organisations would reach nearly five percent of Ethiopia’s GDP. They outlined plans to unify the exchange rate and remove restrictions on current accounts to reduce costs and constrain the use of informal transfer methods.

However, the policy shift has led to high volatility, igniting anxiety in the market over inflation and triggering an economic reckoning. Yet, some of the commercial banks' senior executives remain hopeful that the changes will help stabilise the market.

Teferi revealed Oromia Bank's a strategic initiative designed to lure customers away from informal channels by offering "secure and rewarding" options. The Bank offers customers loans with an 80pc ratio, provided they deposit at least 20pc of their savings in foreign currency.

"This would encourage investment, directing more money through formal channels," he said.

Data from the central bank reveals that remittances (close to six billion dollars) account for 76pc of total foreign exchange transfers. According to the World Bank, such forex sources play crucial role in supporting developing economies. In 2023, remittance flows to low and middle-income countries were estimated at 656 billion dollars, with 54 billion dollars coming from sub-Saharan Africa. Remittance, funds migrants send to their relatives in the home country, can improve the living conditions of those in the receiving end.

The disparity between the official and parallel market exchange rates doubled before the policy shift, as so many opted for informal methods to send money home. Ethiopia has received over 15 billion dollars in remittances in the last three years, with Ethiopians in North America claiming 30pc share. Asia followed them at 29pc, Europe (23pc), and Africa (18.6pc). However, a substantial portion of these funds bypassed official banking channels.

Governor Mamo blamed what he called a "distorted market" for keeping remittance inflows down, noting that the gap between official and parallel market rates had once been as wide as 100pc. According to him, the disparity had contributed to increased capital flight and depleted foreign exchange reserves. However, he sounded optimistic about the impact of the foreign exchange market reforms, attributing a narrowing of the gap to four percent in the past month to the new policies. He warned of administrative measures against those using unofficial channels to send and receive remittances, promising consequences for violators.

“Strict measures will be taken against those who trespass,” he said.

The Governor also revealed that the central bank has been closely monitoring commercial banks’ foreign exchange operations through its auction system, implying that it has helped stabilise the currency market.