For the first time since the National Bank of Ethiopia (NBE) began publishing auction results, commercial banks have failed to fully absorb the foreign exchange supply offered by the central bank. While some observers quickly interpreted the outcome as a sign of waning hard currency demand, financial sector analysts and macroeconomists reject that view, arguing that the undersubscription reflects temporary birr liquidity constraints across the banking system rather than a structural decline in Ethiopia’s demand for foreign exchange.
During the foreign currency auction held on September 9, 2026, the central bank offered 125 million US dollars to commercial banks. Departing from earlier auctions where demand consistently outpaced supply, the 20 participating banks submitted total bids of only 120 million US dollars, leaving 5 million dollars unallocated. All participating institutions received their requested allocations in full at a weighted average exchange rate of 160.5357 birr per US dollar, with the marginal rate settling at 158.3500 birr—reflecting a 1.16 percent appreciation of the birr at the cutoff point.
The undersubscription marks a sharp contrast to Auction No. 27 held on August 26, 2026, when five participating banks submitted bids totaling 170.51 million US dollars against a 125 million dollar supply, creating an oversubscription of 45.51 million US dollars. Similarly, the auction on August 11, 2026, attracted demand nearly four times the available allocation.
Financial analysts emphasize that the undersubscription does not signal a collapse in dollar demand, but rather highlights a tight birr liquidity position among commercial banks. Having approached regulatory liquidity ratios, banks faced constrained capacity to deploy additional local currency for foreign exchange purchases.
Yisehak Teka, a banking and macroeconomic analyst, noted that Ethiopia’s fundamental demand for foreign exchange remains deeply rooted in an economy heavily reliant on imported consumer goods, intermediate industrial inputs, and capital equipment. Import-substitution manufacturing is still developing, and export revenues continue to trail import bills and total remittance inflows.
External indicators reflect ongoing structural adjustments. Although Ethiopia’s gross foreign exchange reserves improved to 5.5 billion US dollars by the first quarter of fiscal year 2026—covering roughly 3.5 months of imports—assessments by the International Monetary Fund (IMF) highlight that external sustainability remains vulnerable to external shocks and dependent on external financing. Central bank data indicates that while the current account deficit narrowed from 6.2 billion US dollars to 1.8 billion US dollars, underlying trade imbalances persist.
Market psychology and liquidity distribution also played a key role in recent auction dynamics. When the central bank conducted a special auction on August 19, 2025, injecting 500 million US dollars—four times its standard offering—it cleared significant pent-up demand among large commercial banks. Lenders that absorbed large allocations during that intervention temporarily satisfied their clients’ immediate import financing backlogs, moderating their demand in subsequent rounds.
According to Yisehak, the slight appreciation of the birr at the marginal rate helps stabilize market sentiment and dampens speculative behavior among importers who historically hoarded inventory anticipating currency depreciation. Businesses expecting the birr to weaken steadily against the dollar face inventory holding costs as the exchange rate stabilizes.
“When depreciation expectations subside, market participants hold birr more willingly, which dampens artificial dollar demand and supports convergence between the official and parallel market rates,” Yisehak told Capital.
Since transitioning to a market-based foreign exchange framework in July 2024, the NBE has replaced administrative currency allocations with regular bi-weekly auctions. The reform program, backed by the IMF and the World Bank, aims to establish a transparent exchange rate system, strengthen monetary policy transmission, and build foreign exchange reserves.
Complementary monetary measures have included lifting credit ceilings, establishing an interest-rate-based monetary policy framework, adjusting foreign exchange commission guidelines, and refining export proceeds surrender requirements.
Financial specialists caution against interpreting a single undersubscribed auction as definitive evidence of permanently reduced foreign exchange demand. Instead, they argue, it demonstrates that regular, market-priced foreign currency supply reduces artificial demand driven by panic buying and currency speculation.
Experts stress that maintaining a predictable and steady supply of foreign exchange remains essential to keeping the parallel market premium low. However, Yisehak emphasized that structural exchange rate reforms must be accompanied by vigilant monetary policy, rigorous monitoring, and reinforced anti-money laundering controls as financial markets continue to mature.
