One Year Into Ethiopia’s Cautious Experiment With the Birr

By Aksah Italo
Published on 12/05/26

For more than a year now, commercial banks have lived in a curious half world, suspended between theory and practice.

Fifteen months after the National Bank of Ethiopia announced a liberalised exchange rate regime, the country’s financial system has become freer, at least on paper.

The July 2024 directive was presented as a turning point. For the first time in over half a century, Ethiopia formally abandoned the rigid monetary orthodoxy that had governed the Birr.

Surrender requirements were scrapped. Interbank trading was allowed. Banks were authorised to quote exchange rates based on market conditions rather than instruction. In principle, supply and demand would now determine the value of the Birr.

From a distance, the early numbers looked reassuring. Coffee and gold continued to earn precious dollars. With monetary discipline unusually firm, the federal government avoided direct borrowing from the Central Bank.

According to IMF updates, Ethiopia’s foreign exchange reserves reached nearly four billion dollars by April 2025, enough to cover close to two months of prospective imports. Exports reportedly exceeded eight billion dollars in 2024/25, almost tripling from the previous year, buoyed by macroeconomic reforms and better commodity prices.

The official exchange rate has also moved decisively. Since liberalisation, the Birr has depreciated by nearly 150 percent. The parallel market premium, once grotesquely wide, has narrowed sharply from more than 100 percent to roughly 19 percent. That is genuine progress. Yet the gap remains twice as large as what is typically seen in countries with functioning foreign exchange markets. The shadow market has retreated, not disappeared.

Market behaviour in late December 2025 captured this tension clearly. Between December 22 and December 27, headline indicators showed little drama. Average buying rates hovered around 152.36 Birr to the dollar, while selling rates averaged close to 155.23.

But the calm was not the product of spontaneous equilibrium. It reflected disciplined pricing by banks and a widespread expectation that the Central Bank was prepared to inject liquidity. Stability was managed. The brewed buck, as traders sometimes call it, showed a gentle firming not because supply and demand had fully reconciled, but because policy signals had done the talking.

Banks have largely complied with this guidance. Exchange rates remain tightly clustered within a policy mandated corridor. Yet within those averages lie revealing differences. Oromia Bank consistently posted the highest selling rates, reaching 158.07 Birr to the dollar on December 27. Berhan Bank briefly joined the outliers, exceeding 156 Birr on multiple days. These institutions were quietly testing where underlying demand lay, even as regulation capped how far they could go.

More telling still is what banks do away from their posted windows. While official rates cluster narrowly, many institutions, led most conspicuously by the state owned Commercial Bank of Ethiopia, routinely pay well above those rates to secure scarce dollars. On average, banks have been buying foreign currency at around 150 Birr to the dollar. The system announces one price and transacts at another.

Beneath this veneer of improvement, familiar stresses endure. Non food inflation remains stubborn at 15.1 percent. The Birr’s weakness feeds into rents, transport costs, and every imported item on a household’s shopping list. Liquidity pressures weigh heavily on banks, while a policy rate fixed at 15 percent offers little comfort to borrowers facing high real borrowing costs.

Another quiet shift has accompanied liberalisation. The removal of administratively fixed deposit rates marked a historic break. For decades, banks had been pinned to a seven percent structure that discouraged saving and dulled competition. Ending that regime should, in theory, have allowed price discovery to take root across the financial system.

Yet while pricing freedom has expanded, regulation has not retreated. It has changed its shape.

Under the newly appointed Governor, Eyob Tekalign (PhD), the Central Bank has intensified enforcement. Banks that fail to report accurately face penalties. Dollar supply is rationed through foreign exchange auctions that are too small and too infrequent to anchor expectations. Freedom exists, but only within firm administrative boundaries.

The external accounts reflect the same imbalance. The current account deficit is narrowing, helped by stronger coffee exports and rising remittance inflows.

The capital account, however, remains under strain. Banks are holding larger dollar pools to service clients, even as private import demand stays weak and domestic lending remains constrained. Any increase in foreign currency on the Central Bank’s balance sheet therefore reflects official support more than genuine market depth.

Credit policy reinforces the cautious approach. Only weeks into his tenure, Governor Eyob oversaw a modest loosening of banks’ credit growth ceilings. From fiscal year 2025 26, lenders may expand loans by up to 24 percent, six percentage points more than before. It was a nudge, not a leap, acknowledging pent up demand while prioritising stability over stimulus in an economy still wrestling with deep imbalances.

International experience suggests this outcome is hardly surprising. Research published in the International Journal of Business and Social Research notes that financial liberalisation in developing economies almost always demands tighter supervision, not looser oversight.

When markets are opened, regulators tend to grip harder to prevent instability. Ethiopia fits the pattern. According to National Bank data, banks’ monthly foreign exchange allocations have doubled year on year to roughly 500 million dollars, even as new rules have narrowed their room to manoeuvre.

Governor Eyob has been explicit about this trade off. The system, he argues, required adjustment rather than abundance. Ethiopia, he notes, has long held surplus foreign exchange on official books, distorted by poor incentives and speculative behaviour. To address this, the Central Bank introduced new regulations on foreign exchange exposure limits, capping banks’ net foreign currency positions.

The rule is technical, but its intent is plain:; to curb hoarding, discourage speculation, and prevent instability under the banner of liberalisation.

Some bankers see gains already. Sidama Bank’s president, Tadesse Hatiya, reports a 60 percent rise in remittance inflows in recent months, which he attributes to the reforms. The bank closed the fiscal year ending June 2025 with a net profit of 126.9 million Birr, a 77 percent increase from the previous year. It mobilised 2.45 billion Birr in new deposits, lifting total deposits to 3.67 billion Birr, an impressive showing for a young third generation lender in a cautious industry.

Others urge patience. Worku Lemma, a financial and investment adviser and long time advocate of reform, describes the new forex regime as better late than never. Fears of runaway over devaluation, he argues, have not materialised. That alone suggests the country is on the right path.

Still, he is clear eyed about the risks. Full liberalisation requires a transition period. Banks must resist speculation, foreign currency hoarding, and opaque fees that confuse customers and erode trust. Strong administrative oversight, he argues, is not a betrayal of liberalisation but its necessary companion.

“Freedom without discipline invites abuse,” he said.

He said that the task ahead is not to choose between liberalisation and regulation, but to align them, to let prices speak honestly.