The recent shift to a market-driven foreign exchange (FX) system in Ethiopia has sparked both opportunities and risks for the banking sector, according to industry experts. While the flow of forex from outside increased following macroeconomic reforms, the anticipated growth in foreign exchange transactions has not materialized as expected.
Since July 29, 2024, commodities such as gold and coffee, which were previously traded on the black market, have begun to be processed through banks. However, experts indicate that the development in this area over the past three months has fallen short of expectations.
Tewodros Hailu, Director of Awash Bank’s Banking Transformation Directorate, commented on the implications of the government’s reforms on the financial sector. “Foreign exchange has brought risk to banks,” he stated. “We were previously focused on local currency, but now FX exchange has become critically risky.”
Tewodros also noted that the introduction of new foreign banks into the Ethiopian market could intensify competition for local banks, particularly given their relatively low capital and assets in dollar terms. He highlighted a significant challenge facing the sector: a lack of trained personnel. “We are working to address this issue,” he added.
Despite these challenges, Habtamu Workineh, Director of External Economic Analysis and International Relations at the National Bank of Ethiopia (NBE), reported that banks’ foreign exchange reserves have reached $600 million within just four months. He noted that the NBE has licensed 12 non-bank foreign exchange offices, which have conducted transactions totaling $774,000 as of November 27, 2024. Of this amount, $540,000 was sold through these offices.
Habtamu emphasized that five of the licensed offices are operational, which could help mitigate the flow of foreign currency into the parallel market.
These developments were discussed during a panel event hosted by the Addis Chamber of Commerce and relevant stakeholders, focusing on the implications of recent macroeconomic reforms on Ethiopia’s financial sector. The discussions underscored both the potential benefits and risks associated with the new FX regime.
The NBE’s reforms aim to create a more competitive banking environment while ensuring that foreign exchange transactions are managed effectively. However, industry leaders have expressed concerns about how these changes will impact local banks and their ability to compete with new entrants.
As Ethiopia navigates its transition to a market-driven foreign exchange system, stakeholders are closely monitoring both the challenges and opportunities that arise. While there is optimism regarding increased foreign exchange reserves and reduced reliance on black market transactions, concerns about competition and personnel training remain critical issues for the banking sector.
