Markets react to Ethiopia Central Bank's $60mn foreign exchange auction

The National Bank of Ethiopia recently held a Special Foreign Exchange Auction, offering $60 million to commercial banks in an effort to manage monetary growth and ensure market stability. This move comes in the wake of increased gold exports, which have significantly bolstered Ethiopia's foreign currency reserves. Mered Fikireyohannes, CEO of Pragma Investment Advisory, provided valuable insights into the auction and its implications for the Ethiopian economy. Fikireyohannes highlighted the recent developments in the Ethiopian market, pointing out that the Central Bank had offloaded $60 million through the auction to 27 participating banks. The weighted average price of the bid stood at 135 birr, indicating strong demand for foreign currency among banks. This surge in interest can be attributed to the need for liquidity in the market, as the economy grapples with a significant liquidity problem. One key observation was the high commissions charged by some banks on foreign exchange transactions, reaching as high as 12%. This has led to a distortion in the market, with actual trading prices significantly higher than the official rates posted by banks. While Fikireyohannes acknowledged the need for more reasonable commission rates to address this issue, he remained optimistic that market corrections would occur in the near future. Looking ahead, Fikireyohannes noted that the government was working on implementing a new monetary policy focused on interest-based principles. As the transition progresses, liquidity challenges are expected to persist for the next several months. While larger banks with substantial foreign reserves can weather the storm, smaller banks are feeling the pressure due to the influx of dollars into the system. In response to questions about Ethiopia's currency shortages and high inflation, Fikireyohannes emphasized the significant progress made in addressing currency challenges. With multinational companies like Dangote repatriating profits and expressing confidence in Ethiopia's economic reforms, investor sentiment has received a substantial boost. While overall inflation is showing signs of reduction, challenges remain on the ground, particularly regarding discrepancies in forex trading rates. Despite these challenges, Fikireyohannes remained hopeful that the strict credit cap in place until September would help stabilize the economy and pave the way for smoother implementation of the new monetary policy system. The ongoing reforms and the success of the recent foreign exchange auction indicate positive momentum in Ethiopia's economic landscape, with opportunities for growth and stability on the horizon.