The Ethiopian birr weakened by 8.1 percent against the US dollar in the first quarter of the 2025/26 fiscal year, despite repeated foreign exchange injections by the central bank, according to the Ethiopian Economic Association’s latest macroeconomic update.

The currency slid from 135.5 birr per dollar in early July to 146.4 by September 30, extending pressure more than a year after Ethiopia moved to a floating exchange rate regime. The decline continued into the second quarter, with the rate crossing 150 and trading at around 154 birr per dollar by mid-December, more than three times weaker than its pre-float level in mid-2024.

A record 150 million US dollar foreign exchange auction on August 5 briefly steadied the market, but the Association said strong demand for hard currency, driven by imports of fertiliser, medicines and capital goods, quickly outweighed the intervention.

The report points to increasing fragmentation in the foreign exchange market. By the end of September, the spread between the highest and lowest bank dollar buying rates exceeded 14 birr, with a similar gap on the selling side. The average daily bid-ask spread widened to 6.8 percent from 3.1 percent in the previous quarter, raising transaction costs for businesses.

One positive development has been a narrowing gap between official and parallel market rates. The Association estimates the premium fell from 18.4 percent in early July to 13.7 percent by the end of September, reflecting larger auctions and tighter enforcement against illicit trading.

The depreciation has improved Ethiopia’s price competitiveness, with the Real Effective Exchange Rate Index down 26.4 percent year-on-year. Export prospects were further supported by higher global prices for gold and coffee, though rising fertiliser costs, with urea prices up 43.3 percent, pose risks to agriculture and inflation.

External demand conditions remain supportive, with growth in the United States and India, tentative recoveries in China and the euro area, and a sharp rebound in Kenya offering potential tailwinds for Ethiopian exports.