Black market re-flourishes

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The gap between official exchange rate and that of black market is widening. Banks are buying one USD for 17.85 birr while selling it for 18.21 birr as of the official rate published by the National Bank of Ethiopia on Friday August 10. The parallel market is buying one dollar for 18.5 birr surpassing Friday’s official selling rate.  Such a trend is observed for the first time since the country depreciated the birr against major foreign currencies two years ago.    The observed difference in the value of exchange rate is diverting hard currency bearers from using formal exchange channels to the informal one creating room for the underground business to re-flourish.    
The gap between official exchange rate and that of black market remained close to one percent for almost two years after the government depreciated the exchange rate of the birr against major foreign currencies on average by 20 percent. However, this gap widening in the past two weeks has reached close to five percent as of last Friday.
The expanding difference shows the imbalance between demand and supply of foreign currency according to experts.
The observed difference in exchange rate has already triggered speculation about possible price hikes in the near future, at least, for imported goods in the business circle of the country. If this speculation materializes, the situation will accelerate inflation which was rather decelerating during the past few months.
“We are processing letters of credit for selected sectors of the economy on a priority basis since there is a foreign currency shortage. There is not as such directive that bans processing it,” said an executive in the banking sector on condition of anonymity a week ago.
Though the inflow of hard currency to the country from remittances, tourism and other sources has not been made public so far, it is reported that the country earned USD 3.1 billion from exports last fiscal year.
The government of Ethiopia envisions single digit inflation and five percent depreciation of the birr against major foreign currencies in this Ethiopian fiscal year.
In what was termed as massive government crackdown, the government confiscated close to USD 6 million from black market dealers in Addis Ababa in March 2008. Since then, the city has not observed such a major move despite fragmented efforts to discourage it. At that time the nation was facing a critical shortage of foreign currency.