Birr on the Rocks as Forex Auctions Chase Ghosts of Stability

Apr 27 , 2025.

Key Takeaways

Ever since policymakers loosened their grip on the foreign exchange regime last August, the Birr (Brewed Buck) has marched lower against the U.S. Dollar (Green Buck).

Yet, the National Bank of Ethiopia’s (NBE) twice-monthly currency auctions, a mainstay of the new policy, have shown the opposite pattern. Official clearing prices have kept edging down, even as commercial banks quote higher cash rates at their counters.

The contradiction came into sharp focus on April 17, when the Central Bank sold 70 million dollars, meeting what it said was “96pc of banks’ foreign exchange demand.” Twenty-six banks joined the round, compared with 27 at the previous sale on March 31.

The weighted average price slipped to 131.49 Br for a dollar from 131.70 Br, extending a slide from 135.61 Br set on February 25, when 50 million dollars went under the hammer.

Commercial banks tell a different story.

In the six days beginning on April 21, the industry’s average cash buying rate was 130.51 Br, while the average selling rate reached 133.03 Br. Oromia International Bank posted the week’s highest cash buying price, 132.53 Br, and the top-selling quote, 135.18 Br, both on April 26.

At the other end sat the state-owned Commercial Bank of Ethiopia (CBE), whose buying and selling rates had barely moved for months, despite market volatility. Its buying price was a mere 124 Br and selling was at 126.48 Br.

CBE’s cut-rate quotes make it the market’s most conspicuous outlier, but the Bank is not conceding business. It quietly tacks on a 12-Br bonus for every dollar surrendered at the counter, lifting the effective rate toward private-bank territory. It is a lute meant to entice mainly remittance senders to bring dollars in through official channels.

Private lenders are matching the move with their off-menu sweeteners.

Zemen Bank is offering a four-percent premium over its posted rate, while Wegagen Bank is dangling two percent. Bank treasurers say the add-ons keep them in the hunt for foreign-currency deposits, especially the remittances that keep Ethiopia’s external accounts afloat, without running afoul of the regulator’s price caps.

Most other major banks, including Abyssinia, Awash, and Dashen kept their official quotes steady through the week, nudging them by only a few cents. That caution speaks to an industry trying to ration scarce hard-currency liquidity while staying within the Central Bank’s narrow tolerance band.

The NBE itself trades in the same market, and its officials behaviour is equally tactical.

During the week, the NBE’s spread, the difference between its buying and selling quotes, was the tightest in the system, a wafer-thin 0.09pc on April 21 that widened to 0.75pc by April 26. Those swings, bankers say, reveal liquidity management rather than pure market forces.

Odd blips appeared elsewhere.

Bunna Bank, usually a follower, opened on April 21 with a spread of 1.22pc, under the customary two percent. By April 24, it was back in line, unveiling a grab for market share. Hijra Bank, by contrast, inched both its buying and selling offers higher each day.

All of this leaves the official auction looking increasingly disconnected from reality. The NBE has lifted the allotment twice, from 60 million dollars early in April to 70 million on April 17. Nonetheless, the clearing price keeps falling.

Commercial banks, facing customers who will not part with their dollars cheaply, are paying more, not less. The 12-Br bonus at CBE and the percentage premiums at Zemen and Wegagen make clear where demand really sits.

The divergence matters because the auction price serves as an anchor for expectations about and price discovery of the Birr. A falling anchor, coupled with rising counter rates, feeds the perception that the Brewed Buck is headed for another leg down. That risk is heightened by the shaded parallel market, where the dollar commands an even richer price at 154 Br last week.

Policymakers concede the tension but say the auction is doing its job by rationing scarce supply in a transparent way. Forex market observers see that the mechanism is too infrequent — if it can be sustained at all — and too blunt to drain pent-up demand. They worry that if reserves slip further, Governor Mamo Mihretu will have to choose between shrinking the allotment or letting the price jump, both of which could spook the market.

That the forex system is showing the strain is evident. Banks have little choice but to tack on incentives, eroding their fee income. Importers complain that even when bids are filled, the wait for letters of credit permits can stretch weeks. Exporters, seeing the Birr weaken, hold back earnings in foreign accounts.

Ordinary Ethiopians, sensing the drift, convert what they can the moment relatives send money from abroad.

The experiment in forex liberalisation was supposed to smooth the Birr’s descent, not accelerate it. The events of late April uncover that the policy is at a crossroads. Unless officials recalibrate, perhaps by moving to weekly auctions, widening the trading band or easing paperwork for diaspora deposits, the gap between the auction hall and the cash counter will only grow, inviting the speculation the forex regime was designed to quell.

The Brewed Buck may be losing its foam, but it still costs more at the bar than at the brewer’s gate. Until that changes, the currency market will remain caught between two prices and one unrelenting demand for dollars.

PUBLISHED ON Apr 27,2025 [ VOL 26 , NO 1304]

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