NBE Governor Blames ‘Bad Practices’ At Banks For Stubborn Forex Rate Disparity

The Governor of the National Bank of Ethiopia (NBE) says mismanagement at commercial banks is fueling the gap between official and parallel forex exchange rates, which has proven difficult to close nearly a year after liberalization.

The stubborn discrepancy was among the several topics Mamo Mihretu addressed while facing questions from members of Parliament’s Budgetary and Financial Affairs Committee this week. MPs grilled the Governor about inflation, banking services, project implementation, audit recommendations, and other issues falling under the purview of the central bank.

Mamo conceded that the gap between the official and parallel rates remains problematic, and acknowledged that importers have increasingly been prompted to look for alternative sources of forex—a situation he says comes down to systemic and procedural errors at banks.

Commercial banks are currently offering an estimated average of 134 Birr for one US Dollar, while rates in informal channels are nearer to 160 Birr/USD. While the parallel market rate can fluctuate, recent reports indicate a decrease in the premium due to regulatory action and increased enforcement against illegal forex trading.

The MPs criticized the Governor and the administration’s IMF-backed economic reforms for failing to narrow the gap further.

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Mamo pointed out the disparity exceeded 100 percent before the currency was floated in late July 2024, and argued it, at times, had fallen to as low as five percent.

“That was a result of overall economic activity, and as demand for forex in the parallel market rises, it was all too logical for the premium between the official and parallel market to go higher accordingly,” he said. “In the context of our country, the kind of premium shown is inherently unavoidable.”

One of the reasons, according to the central bank Governor, is the fact that “we have not opened a capital account for importers to access, though the reform stipulates that importers will have access to forex as per their needs via the regular channels.”

He argued the unavailability of capital accounts creates demand from importers for easy, flexible access to forex.

“To bring about a par between the official and parallel market exchanges requires steady and persistent work geared towards tackling the causes,” he said. “Our studies show that one of the reasons for high premiums in the parallel market comes down to gaps in the banking system.”

He cited examples of importers being unable to access forex for down payments for goods from countries like China and Turkey.

“The present system does not allow them to apply for advance payments whereas the source countries demand financing instruments guaranteeing advance payments have been settled. This is one of the reasons the demand for the parallel market remains high,” said Mamo.

He told MPs that the NBE has issued a directive for banks to fine tune their systems in line with importers’ advance payment requirements, adding that regulators have also set the maximum allowable thresholds.

The second problem, according to him, is red tape and bureaucracy at banks.

“The bank approval process after importers have applied for advance payments is lengthy,” said Mamo, arguing that commission fees and other charges for forex services at banks are also pushing away importers.

“To tackle this problem, we again issued a directive limiting the charges and fees expected of importers to be not more than  four percent,” he said.

Asked about recent reports of a developing liquidity crisis within the banking industry, the Governor said mismanagement is to blame.

“Bad practices at some banks often leaves them in short supply of cash,” he told MPs.

However, industry insiders who spoke to The Reporter argue the liquidity crunch is attributable to imbalances in deposit-lending growth, inflation and economic instability, crowding out by government borrowing, and structural inefficiencies in deposit mobilization.

They contend that commercial banks are being hampered by the central bank’s policies, including restrictions on forward exchange contracts (FEC) that allow banks to buy or sell a specific amount of one currency for another at a predetermined rate on a future date.

Some business analysists also argue that foreign currency shortages and lower remittances have weakened banks’ liquidity, particularly their foreign exchange positions.

They  contend that weak export performances have reduced forex inflows and, by extension, liquidity tied to forex transactions.

Insiders who spoke to The Reporter all agree that cash shortages and currency hoarding have eroded trust in the financial system, particularly following the demonetization process of late 2020.

Cash hoarding remains prevalent, meaning less money is circulating through formal channels, while the parallel market for forex further drains cash from the formal banking system.

Data from the World Bank indicates that less than half of all Ethiopians hold a bank account. The country’s 31 commercial banks depend largely on urban centers like Addis Ababa for the bulk of their deposits, creating geographic concentration risks.