Ethiopia’s black market exchange rate for the US dollar has reached a critical milestone, crossing the 140 birr mark. This widening gap between the black market and the official rates presents serious challenges for the country’s economy, businesses, and consumers. As of mid-October 2024, while the official National Bank of Ethiopia (NBE) rate stands at 116.97 birr per dollar, the informal market has surged to 140 birr, reflecting an alarming divergence.
The 140 Birr Milestone: A Tipping Point
The significant rise in the black market rate, now standing at 140 birr per dollar, marks a crucial tipping point in Ethiopia’s foreign exchange struggles. This milestone comes after months of growing instability, largely fueled by the inability of the formal financial system to meet the demand for foreign currency. This divergence from the official rate is the clearest indicator yet that the country is facing severe currency shortages, leading businesses and individuals to rely on the black market despite the legal risks involved.
A Shift in the Trend: From Stability to Crisis
In July 2024, Ethiopia took a bold step by floating its currency in an effort to create a more market-driven foreign exchange system. Initially, this decision helped narrow the gap between the official and black market rates. The move was praised for increasing the availability of foreign currency through formal channels, and for a few months, the gap between the two markets showed signs of closing.
However, this momentum began to lose pace after just a few months. While the initial floating of the birr brought the rates closer, external economic pressures, declining foreign reserves, and growing demand for foreign currency quickly reversed the trend. By October, the black market surged to 140 birr per dollar, widening the gap once again and signaling that the reforms had failed to create a sustainable balance between supply and demand.
The Official Exchange Rate Struggles to Keep Up
As of October 2024, the National Bank of Ethiopia maintains an official exchange rate of 116.97 birr per dollar for buying and 123.63 birr for selling. These figures, however, are disconnected from the reality on the ground, where businesses and individuals needing foreign currency must resort to the black market. While the NBE’s efforts to maintain control of the currency are evident, the inability of banks to meet the rising demand for dollars has pushed people into the informal sector, where the rates are significantly higher.
The situation is not unique to the dollar, as rates for other currencies, including the euro and the pound sterling, show similar patterns. For instance, the official buying rate for the euro stands at 130.48 birr, while the black market offers a much higher rate. This gap illustrates the growing reliance on unregulated markets for foreign exchange, which has only increased as official channels fail to meet demand.
Historical Context: A Longstanding Challenge
The National Bank of Ethiopia initiated an overhaul of the foreign exchange management system, and the Commercial Bank of Ethiopia (CBE) distributed over USD 282 million to various sectors. These reforms aimed to create a competitive market-based system and improve the efficiency of foreign currency allocation. While they were expected to boost foreign trade and stabilize the exchange rate, they have not delivered the intended results. Instead, the gap between official and black market rates has steadily grown, culminating in the recent breach of the 140 birr threshold.
Impact on the Economy
The 140 birr black market rate carries significant consequences for Ethiopia’s economy:
Inflation: Businesses that rely on imports must pay higher prices for foreign currency on the black market, and these costs are passed on to consumers. The result is higher prices for goods, contributing to inflation that is already a pressing issue in Ethiopia.
Business Challenges: For companies that depend on foreign currency for importing goods, accessing dollars at 140 birr makes operations unsustainable. This forces businesses to either scale back or pass the higher costs onto their customers.
Public Distrust in Banks: The growing reliance on the black market for foreign currency erodes trust in the formal banking system. If banks cannot meet the public’s demand for foreign currency, individuals and businesses will increasingly turn away from formal channels, further undermining the effectiveness of the official exchange rate.
Widening Economic Inequality: The black market benefits those with access to foreign currencies while placing a heavier burden on those who cannot. Wealthier individuals and businesses can take advantage of the more favorable black market rates, while the average Ethiopian faces higher costs for everyday goods.
The Ethiopian government and the National Bank of Ethiopia face a difficult challenge in addressing the widening gap between official and black market exchange rates. A more flexible exchange rate policy could help alleviate the pressure, but it carries risks. Devaluing the official rate might close the gap temporarily but could lead to inflationary shocks in the short term. This, in turn, could spark social unrest, as rising costs of living would put further pressure on an already struggling population.
The crossing of the 140 birr per dollar threshold in Ethiopia’s black market is a stark indicator of the country’s deepening foreign exchange crisis. After the initial optimism following the currency floating in July, the gap between the official and black market rates has once again widened, highlighting the underlying challenges in meeting the growing demand for foreign exchange. Addressing this crisis will require bold and decisive actions by the government and the National Bank of Ethiopia to stabilize the market, boost foreign exchange reserves, and restore trust in formal financial institutions. Without significant intervention, the gap could continue to widen, with far-reaching consequences for the nation’s economy.