The foreign-exchange auction turns two this month. Its 25 rounds since August 2024 have offered a running scorecard of the dollar market. More often than not the bids have run ahead of the dollars on offer.
The auctions have injected substantial foreign currency into commercial banks and helped establish a more transparent mechanism for determining the birr’s price. But after two years, the most striking feature of the programme is how rarely the central bank has offered enough dollars to satisfy all the bids from commercial banks.
In fact, there has been only one auction in which the amount of foreign currency offered exceeded the total bids from participating banks. That was the February 21, 2026 special auction, when the NBE put 500 million US dollars on the table but banks sought only 455.29 million US dollars. All 30 participating banks received the full amount they requested, leaving
44.71 million US dollars unallocated.
That episode stands out precisely because it has been the exception.
The latest regular auction, held earlier this week, offered USD 125 million. Banks submitted bids worth USD 470.17 million, meaning demand was about 3.8 times the amount available. The subsequent special auction on Aug. 20 offered USD 500 million, but banks still submitted bids totalling USD 710.14 million.
The contrast captures the central tension in the foreign-exchange market two years into the reform. The National Bank of Ethiopia has accumulated more foreign currency and is able to supply the banking system with considerably larger amounts than it could before the July 2024 reforms. Yet the banking system continues to present the central bank with demand that, in most auctions, is substantially larger than the amount being offered.
The gap between foreign currency supply and demand has deeper roots. Ethiopia is turning on more taps for imports than it is opening for exports. Private-sector demand and higher fuel costs are expected to push imports of goods and services up by 21.0 percent in 2025/26 fiscal year, after 3.2 percent growth a year earlier. Exports are forecast to grow by 17.2 percent, helped by gold and coffee. Even so, the goods trade deficit is expected to widen to 12.6 billion US dollars.
There is another, less obvious, claim on the country’s dollars: banks themselves. As they digitise, banks are spending more on core-banking systems, cloud computing, cybersecurity, data centres and payment infrastructure, much of it supplied by foreign companies and paid for in foreign currency.
“Even the things we export have high import content. It is not only about imports. Whether it is coffee or anything else we export, there are inputs involved,” said Yisehak Teka Nibere, a former senior NBE banking expert and current chief compliance and risk officer at a capital-markets firm.
He said the same dynamic extends to the financial sector, where the amount of foreign currency absorbed by banks and other financial institutions is not always visible simply from the dollars they hold.
“Take core banking, payment systems or even the systems used by the capital market. They all carry licence fees. And it is not just the hardware. Banks and other financial institutions pay for software licences, often on a per-account basis, as well as additional fees whenever the systems are upgraded,” he said.
The precise size of this outflow is difficult to establish because banks do not routinely disclose their foreign software and technology payments separately. But even a conservative estimate suggests that the bill could run into hundreds of thousands of dollars a year. If 30 commercial banks each spent an average of 250,000 to 750,000 US dollars annually on foreign software licences and related technology fees, the sector would be spending roughly 7.5 million to 22.5 million US dollars before accounting for payment systems, upgrades, cloud services, cybersecurity and consultancy.
Yisehak also pointed to consultancy payments as another source of foreign-currency outflows. Financial institutions bring in foreign consultants for specialised services, while government projects also hire international consultants.
“Are they really skills that we do not have? Are these gaps? Are they examined by foreign affairs and given work permits because they are skills that do not exist in our country?” he told Capital.
One of the central bank’s objectives when it introduced the FX auction alongside the shift to a market-based foreign-exchange regime was to contain temporary disruptions that threatened the smooth functioning of the market. Since the float, access to foreign currency has improved, banks’ FX liquidity has strengthened and the parallel-market premium has narrowed at times, although the move to a fully market-determined exchange rate remains incomplete.
The International Monetary Fund expects gross international reserves to reach 5.9 billion US dollars by the end of 2025/26 fiscal year, more than four times the 1.4 billion US dollars recorded before the programme. The parallel-market premium has also narrowed to about 11 percent, following 14 FX auctions between July 2025 and May 2026 that supplied a combined
2.5 billion US dollars to commercial banks.
Yet stronger reserve buffers have not removed the underlying imbalance in the market. By end-April 2026, banks still carried an estimated 1.4 billion US dollars in unmet FX demand, even as every bank remained within the NBE’s prudential net open position limits.
“The gap between supply and demand points to a continuing shortage of foreign currency. With demand still running well ahead of supply, foreign-currency prices could face further upward pressure in the days ahead,” said Worku Lemma, a seasoned banker.
He said two years was too short a period to judge whether the central bank had achieved its objectives, given the depth of the problems it inherited. Foreign-exchange reserves had been depleted, while the imbalance between imports and exports remained substantial.
“Some illnesses require treatment for a lifetime; others can be cured quickly. I do not think this is a lifetime illness,” he told Capital.
The first auction, held on August 7, 2024, came shortly after the NBE abandoned the previous exchange-rate framework and allowed the birr to move more freely against foreign currencies. The first auction cleared at 107.90 birr per US dollar.
By April 2025, the NBE had moved from occasional special auctions to a regular programme, initially offering 50 million US dollars every two weeks. The central bank said the auctions would provide part of its accumulated foreign currency to the private sector while helping it meet monetary-policy objectives.
The size of the intervention has since changed substantially. The regular auction eventually settled around 70 million US dollars, while the NBE repeatedly turned to 500 million US dollar special auctions when pressure intensified. Those larger interventions have revealed just how elastic demand for foreign currency can be.
On January 27, 2026, the NBE offered 500 million US dollars and received 592.3 million US dollars in bids from 31 banks. Twenty-five banks received allocations.
On May 19, it offered another 500 million US dollars. This time bids reached about 1.06 billion US dollars, more than twice the amount available. Only 14 of 30 participating banks received allocations.
The auction serves a purpose beyond allocating scarce foreign currency. It is meant to bring greater transparency to the market, allow prices to emerge competitively and reduce the distortions and speculative pressures that can arise when foreign currency is rationed through less transparent channels. Yet two years on, price discovery remains an unfinished business. Banks continue to cluster their bids, while interbank FX trading remains limited and episodic, according to the IMF.
Worku is cautious about treating the auction rate as a complete reflection of market value. “I would not say that the auction price fully captures the market price. It can be an indication of where the market is heading, but I believe we should move gradually towards full market-based price discovery rather than simply letting the market go. Doing so without adequate preparation could have adverse consequences,” he said.
He added that a deeper interbank FX market would give banks another way to manage foreign-currency surpluses and shortages. Banks with excess dollars could sell to those facing shortages, much as liquidity is redistributed between banks in the interbank money market. “The idea is there, and I think it is beginning to take shape,” he said. In the meantime, he argued, the
NBE should continue to provide a stabilising backstop through its auctions until the interbank market is deep enough to bring foreign-currency supply and demand into better balance.
The IMF has warned that continued reliance on FX auctions could complicate that transition because the auctions affect banking-system liquidity alongside the NBE’s interest-rate-based instruments. When the NBE sells foreign currency, banks pay in birr, draining liquidity from the system. That may tighten monetary conditions, but it does so through an FX operation rather than through the policy rate or open-market operations. As the NBE seeks to make the policy rate the main signal of its monetary stance, the continued use of FX auctions could blur the transmission of monetary policy and make it harder to distinguish liquidity changes arising from monetary-policy decisions from those driven by foreign-exchange intervention.
Yisehak questioned whether FX auctions should be viewed as a straightforward drain on banking-system liquidity. When the NBE sells dollars to banks, it receives birr in return. Banks then recover birr when they sell the foreign currency to importers.
The more important issue, he argued, is the timing of these transactions. Banks may have to pay for foreign currency before they receive the corresponding birr from importers. Since many import transactions are financed through trade credit or bank financing, that gap can temporarily tighten a bank’s liquidity.
The dollar tap is becoming a global pressure point as the war involving the US, Israel and Iran disrupts energy flows, strengthens the greenback’s safe-haven appeal and tightens financial conditions for vulnerable economies. The Strait of Hormuz, through which roughly one-fifth of global oil and LNG shipments normally pass, remains heavily constrained, while Brent crude has climbed to about 88 US dollars a barrel.
The Middle East accounts for about 19 percent of Ethiopia’s non-gold goods exports, while the Gulf provides roughly 35 percent of remittance inflows. In March 2026, one of the country’s two main petroleum suppliers declared force majeure, forcing the country to turn to spot-market purchases. The total cost of emergency diesel purchases, including supplier premiums, shipping, insurance and financing, reached about 270 US dollars a barrel, while jet fuel costs rose to around 300 US dollars.
The IMF said the pressure has not yet translated into a sharp deterioration in the birr, with exchange-rate expectations remaining broadly stable, depreciation relatively low and steady, and some appreciation in the parallel market. It warned, however, that this could change if the conflict persists and Ethiopia’s terms of trade deteriorate.
Reducing import dependence is another piece of the structural reform that remains unfinished. The government has been pushing import substitution through initiatives such as the Made in Ethiopia movement, which it says has helped expand domestic manufacturing capacity and market share. In July 2026, the Ministry of Industry also published a National Import Substitution Strategy covering selected manufacturing subsectors.
But replacing imports is not simply a matter of producing more at home. Manufacturers still face constraints including access to foreign currency, finance, technology and industrial inputs. The World Bank said that even firms seeking to expand domestic production remain exposed to FX constraints and exchange-rate volatility.
The harder reform may be less glamorous: making the machinery of government predictable. Investors still complain of regulatory barriers, arbitrary taxation, weak property rights and difficulty obtaining foreign exchange. The IMF says the direction of reform has been welcomed, but its implementation has been uneven and the improvement in the operating environment limited.
