Ethiopia Caps Forex Spreads at 2% in Market Reform Push

The National Bank of Ethiopia has introduced a new policy limiting foreign exchange trading spreads to 2%, effective October 16, 2024.

This move marks a significant step in Ethiopia’s ongoing economic reforms, aiming to stabilize the currency market and increase transparency in forex transactions.

Ethiopia shifted to a market-based exchange rate system in July 2024, replacing the previous tightly controlled regime. This change is part of broader economic reforms addressing long-standing financial imbalances in the country.

Before the reforms, commercial banks traded the Ethiopian birr at around 57 to one US dollar, with a spread of less than one birr. By October 12, 2024, the average selling rate had climbed to 125 birr per dollar. The spread exceeded 10 birr.

Following the central bank’s announcement, the Commercial Bank of Ethiopia adjusted its rates, now buying dollars at 113 birr and selling at 115 birr.

The new policy also requires banks to disclose all fees and commissions separately, enhancing transparency in foreign exchange transactions. While capping the trading spread, the central bank still allows some flexibility.

Navigating Economic Reforms in Ethiopia

Banks can adjust rates based on market conditions and negotiations with specific clients, balancing stability with market dynamics. Ethiopia’s economy is projected to grow by 6.2% in 2024, with inflation expected to reach 25.6%.

The country has been working closely with the International Monetary Fund, which approved a $1 billion credit facility in July 2024 to support Ethiopia’s economic program.

These reforms aim to make Ethiopia more attractive to foreign investors by stabilizing the forex market and increasing transparency. However, businesses must remain cautious about inflationary pressures due to currency depreciation.

The new policy could help reduce the gap between official and black market exchange rates, potentially curbing illegal currency trading. The government’s commitment to these reforms signals a move towards a more open and market-oriented economy.

As Ethiopia continues its economic transformation, the full impact of these measures remains to be seen. The coming months will reveal how these changes affect Ethiopia’s economic landscape and its position in the global market.

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