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Ethiopia’s birr is again under pressure one year after the move to a market-based exchange rate, with new data showing faster depreciation, widening gaps in the interbank market and rising transaction costs, despite repeated central bank interventions.
According to a macroeconomic update by the Ethiopian Economic Association (EEA), the birr depreciated by 8.1 percent in the first quarter of the 2025/26 fiscal year (July–September), falling from 135.5 to 146.4 per US dollar. The slide continued into the second quarter, crossing 150 and reaching about 154 by mid-December—more than three times weaker than its pre-float level of around 50 birr per dollar in mid-2024.
The EEA report, “Ethiopia’s Exchange Rate Reform After One Year: Assessing Stability, Competitiveness, and External Pressures,” notes that a record USD 150 million FX auction in early August 2025 provided only temporary relief. Strong demand for foreign currency—driven by imports of fertiliser, medicines and capital goods—continues to overwhelm limited supply, blunting the impact of large interventions.
Market fragmentation has intensified. By the end of September, the gap between the lowest and highest interbank dollar buying rates exceeded 14 birr, while retail rates differed by nearly 15 birr across banks. The average daily bid–ask spread widened sharply to 6.8 percent from 3.1 percent in the previous quarter, signalling higher transaction costs, weak arbitrage and increased risks for traders. Analysts warn these conditions may encourage hoarding and reflect unrecorded FX outflows that auctions alone cannot reverse.
One positive development is a narrowing gap between official and parallel market rates. The parallel market premium fell from about 25 birr (18.4 percent) in early July to roughly 20 birr (13.7 percent) by late September, suggesting that the new regime and larger auctions are gradually drawing FX demand back into formal channels.
The steep depreciation has also improved Ethiopia’s measured price competitiveness. The Real Effective Exchange Rate fell 26.4 percent year on year, while the Nominal Effective Exchange Rate declined 25.7 percent, correcting what many viewed as an overvalued currency. However, the EEA cautions that export gains will depend on firms’ ability to expand supply and on containing inflation from higher import costs.
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Externally, Ethiopia has benefited from stronger prices for key exports. Gold and coffee earnings rose by nearly 40 percent and 37 percent, respectively, improving terms of trade. PMI readings above 50 in major partner economies point to resilient demand that could support exports if producers can capitalise on the weaker birr.
Looking ahead, the EEA calls for a broader policy response to stabilise the FX market. Priorities include deepening the interbank market, rebuilding foreign exchange reserves, reducing reliance on critical imports such as fertiliser, and strengthening coordination between monetary, fiscal and trade policies to prevent inflation and renewed parallel market pressures from eroding competitiveness gains.
