Central Bank Misses the Mark on Forex Market Speculation

Nov 1 , 2025.

The National Bank of Ethiopia (NBE) issued a statement two weeks ago that appeared to be a determined strike against "illicit finance."

A note made public demanded closer scrutiny of customers who use personal or third-party accounts for business transactions. The stated objective of "safeguarding the financial system and curbing tax evasion" could sound noble. However, the statement exposes how wide the gulf is between the regulator’s intentions and the financial reality on the ground.

The new order appears to draw its authority from a law passed this year, citing the Central Bank’s own review, which uncovered “a significant number” of customers moving business funds through private accounts. Such behaviour, the Central Bank warns, “may reasonably be suspected as proceeds of crime or as being related to, linked with, or intended for illegal activities.” From Addis Abeba to regional towns, bank branch managers now face a choice of treating thousands of ordinary clients as suspects or risk falling foul of the regulators.

The problem is that the commercial code itself invites the mingling that the Central Bank now deems suspicious. Of the four recognised business forms — sole proprietorships, partnerships, limited liability and share companies — the first two dominate the small-enterprise landscape. For them, there is no legal separation of purse and pocket. Owners share one tax identification number with their businesses, where liabilities and assets become blurred. To insist that the use of personal accounts is inherently shady is to mistake commonplace practice for criminal ingenuity.

Why the sudden zeal, then?

The answer lies in the fragmented foreign exchange market. The gap between the official and the parallel rates has become a chasm. Last week, traders quoted more than 30 Br to the dollar, almost 19pc above the official rate of about 151 Br. Regulators suspect that speculators shuttle money among company, shareholder and third-party accounts to profit from both prices.

Instead of quelling speculation, the Central Bank’s net risks ensnare the small-business backbone, which is already battered by excessive regulatory enforcement, unbearable tax burden, inflation, and uncertainty. The statement muddies rules rather than clarifying them. Banks, warned to be vigilant, should now decide how far “Know Your Customer” duties stretch. If they flag every transaction involving a personal account, they would undoubtedly overwhelm the system and antagonise legitimate clients. Failing to do so would make them complicit in money laundering.

Monetary policy bears much of the blame for this. Banks were supposed to be free to trade forex based on their discretionary judgment. Alas! They cannot quote too high, or they would be called in for questioning. Official guidance, often delivered in regular moral-suasion meetings with regulators, keeps rates in an iron grip. Starved of dollars, the formal market stagnates while the parallel market blossoms.

Administrative bans cannot repair this policy schizophrenia. Still less can they replace the missing foreign-exchange reserves that give a central bank clout.

Ethiopia’s coffers held 2.8 billion dollars in September 2025, which the IMF projects to grow to 3.5 billion dollars next year, covering 2.1 months of import cover and well under the IMF’s comfort threshold. With such limited ammunition, the Governor Eyob Tekalegn's (PhD) ability to smooth volatility by buying or selling hard currency is sharply constrained. Intervention works only when traders believe the Central Bank has both the firepower and the resolve to persist. Otherwise, they bet it will soon retreat.

The trouble with successive generations of policymakers lies in their stubborn conviction that exchange-rate stability can be commanded. Hence, they allow the official rate to be set by fiat, knowing full well that the parallel rate reflects reality. Until this gulf narrows, the temptation to blame traders rather than their own policy will persist.

The recent note only shows how far the authorities may stretch. It orders banks to police personal account use yet offers no guidance beyond slogans already embedded in anti-money laundering rules. Nor does it specify how the directive aligns with the Financial Intelligence Agency, whose primary role is to monitor suspicious transactions.

Ironically, by blurring the lines between monetary, fiscal and investigative roles, the Central Bank may weaken its own credibility. When every regulator claims every problem, none can be solved. Businesses already tell tales of bureaucratic confusion. Such Kafkaesque episodes erode trust and push more activity into the shadows.

Past experience shows the limits of regulatory reflex. For decades, monetary policy officials have relied on capital controls to tame exchange-rate swings. Results have been mixed at best. More subtle tools exist. Where speculation is rife, regulators elsewhere have capped leverage, limiting traders’ ability to borrow and amplify bets. Such measures curb volatility without strangling genuine commerce. Governor Eyob and his officers could adapt similar ideas instead of casting doubt over every personal bank account.

Yet, even that would treat symptoms rather than causes. The real cure is a credible path to a unified exchange-rate regime. This requires loosening the grip on pricing, allowing the Birr to discover an honest level and freeing banks to match buyers and sellers transparently. It also means rebuilding reserves, whether through concessional loans, export promotion or measured debt issuance, to provide the backstop that markets respect.

Instead of piling on bans, they can combine reserve accumulation, forward-market tactics and frank communication for a persuasive outcome. By acknowledging that lasting calm requires both macroeconomic discipline and occasional intervention, they can slowly regain credibility.

For now, the NBE appears wedded to ambiguity. Its circular reproaches the smallest entrepreneurs for behaviour that the law itself permits. It scolds bankers for failing to monitor transactions that regulators have never defined adequately as risky. It blames tax evasion, a domain better handled by the Ministry of Revenues, and financial crime, already policed by the financial intelligence agency. Each new layer of oversight raises costs and confusion without plugging the holes that matter.

The foreign-exchange dealers know this. They see the sparse reserve figures and the yawning spread at the kerbside kiosks. They also see opportunity. When policy is opaque, arbitrage beckons. When official prices lag behind economic reality, parallel markets flourish. In such an environment, speculators need no complex corporate webs. They need only a regulator grasping for quick fixes. Until the Central Bank embraces transparency and discipline, it will lurch from one statement to the next, mistaking business as usual for wrongdoing and confusing harsh language with practical action.

The economy, already short of dollars and trust, can ill afford the distraction. Administrative bravado cannot substitute for clear rules, sound reserves and a willingness to let markets work.

Undoubtedly, NBE’s order may chill some illicit schemes, but it will also chill legitimate business. Entrepreneurs who once opened accounts freely may hesitate. Bankers, wary of regulatory backlash, may over-report and clog the system. Regulators, drowning in data, may chase phantoms while real abuse slips away. In the end, it could find itself with no safer a financial system, no narrower exchange-rate gap and no stronger reserve position—only more uncertainty.

Speculation is not born in a vacuum. It thrives where policy sends mixed signals. It retreats when rules are clear, prices are credible, and the authorities speak with one voice. Governor Eyob's Central Bank, facing a market starved of trust and dollars, has chosen ambiguity over clarity, as well as admonition over reform. The country deserves better.

PUBLISHED ON Nov 01,2025 [ VOL 26 , NO 1331]