Members of the European business lobby representing nearly 185 investors in Ethiopia said a crunch for local currency has transpired following Ethiopia’s transition into a market-based exchange regime. The investors voiced their concerns directly to central bank governor Mamo Mihertu, during the EuroCham Monthly CEO Networking event last week.

While the investors, who are members of the European Chamber in Ethiopia, acknowledged improved foreign currency liquidity following the reforms, they reported a new handicap with Birr shortages. Difficulties sourcing the Birr counterpart needed to open new Letters of Credit was attributed to the tightened monetary policy conditions in the latest review of Ethiopia’s economic reform program by the IMF.

The European investors also inquired about the continuation of Franco Valuta imports, businesses impacted by the reforms, and tight monetary conditions following the Governor’s address.

Mamo responded by noting that the central bank sequenced the monetary policy reform to protect low-income households, learning from other countries’ experiences. Acknowledging that the reform impacted the central bank’s balance sheet and government debt, the Governor said it was necessary to replace an unsustainable system that constrained development. He mentioned that support is being provided to affected businesses, including the provision of working capital loans. The Governor stated that Franco Valuta is restricted to merchandise traders and wholesalers but allowed—as before—to manufacturing investors.

Following Ethiopia’s adoption of a four-year economic reform program prescribed by the International Monetary Fund (IMF), FX reserves have nearly doubled to 5.9 billion dollars. FX transaction volumes have also surged, with banks purchasing an average of US$ 500 million per month and selling an average of US$ 700 million per month over the past quarter. However, the bid to contain inflation at manageable rates has necessitated bi-weekly liquidity absorbing open market operations by the central bank which have contributed to the shortage of the Birr

The reforms have led to a sharp reduction in the parallel market premium from nearly 100% to about 5%, facilitating more competitive rates for remittances.

Despite these positive developments, concerns linger among EuroCham members, who have invested in Ethiopia. They are worried about the indirect impact that tightened monetary conditions may have on operational liquidity for domestic operations.

Banking industry insiders acknowledge the persistence of liquidity challenges across the sector for the past few years which have worsened in recent months. Private banks have been particularly impacted as evidenced by protracted delays in interbank settlements. The latest NBE financial stability report also reflects the trend as liquid assets to deposits ratio of the banking industry continued its steady decline dipping by 1.8% to 22.4% in the current year after falling by 3% in 2023.