Ethiopia: Enhancing the Nation Hard Currency to Make the Nation Economy Competent

The government homegrown economic reform clearly indicates that the ongoing liberalization will be consolidated.

Among others the measures like privatization, forex floating, allowing foreign banks raising interest rate can be mentioned.

Kostentinos Berhe (PHD) is a Senior Economist working for various institutions as consultant. As to him, before the coming to power of the EPRDF regime in 1991 the nation’s economy was command economy dominated by the public sector.

Private enterprises that flourished during the imperial regime had been nationalized and the chance to pull foreign investment was very little. There was no competition among enterprises and the production was not governed by supply and demand rather it relied on quota. As the result, the economy stagnated and failed to score meaningful stride.

Right after the coming to power of the new regime in 1991, its priority was denationalizing the economy through privatizing public enterprises. Immediately medium and small scale enterprises including manufacturing such as leather and leather producing enterprises, beverage industries, textile and garment and large scale farms were privatized.

New laws helpful for the flourishing of private enterprises were introduced; it adjusted the birr/Dollar exchange rate based on the demand supply. It was remembered that birr was overvalued which made attracting foreign investment very difficult.

The opening of the economy to foreign actors gave way for attracting foreign investment and the inflow of billions of Dollars witnessed. To support the endeavor International Financial Institutions provided money in the form of loan.

Foreign and local investors get license to engage in various sectors including large-scale farming, manufacturing and services. Foreign investors from India, China, Turkey and other countries opened their business here.

To facilitate the incoming foreign investors the government built industrial parks equipped with fool services such as clean water, electric power and internet services with fair price. In addition the provision of financial services including opening of banks inside the parks encouraged investor to unleash their working potential.

According to the officials of the Industrial Parks Corporation, the operation of manufacturing targets creates job opportunity to thousands, import substitution, creating link with the agriculture sector through utilizing agriculture products as inputs, boost export, creating self -sustained private sector and in these regard they are playing crucial role.

It is obvious that even though manufacturing contributes for the garnering of foreign currency, they import various products utilized as inputs which incurs huge amount of hard currency on the nation.

In addition, the nation spends huge amount of currency for the importation of strategic items including fertilizer, fuel and medicines.

When the economy grew the nation resorts to import more capital goods and other products utilized as inputs which necessitate more hard currency.

According to the recent National Bank report annually, the nation imports 20 billion worth of hard currency while it exports about 4 billion Dollars. There is about 16 billion Dollars of deficit. To fill the gap the government utilized remittance money obtained from diaspora and loan from the international financial institutions.

According to official report from NBE, by now the nation is categorized as poor indebted country worth of 26 billion Dollars. As mentioned above, to address the shortage of hard currency the government floated the birr- Dollar exchange rate and currently in the official market, one Dollar is exchanged by 129 birr while in the parallel market it is exchanged up to 150 birr.

Among the objectives of floating the exchange rate is to attract foreign investment, boost export, and attracting Ethiopian diaspora to send hard currency to families at home through formal channel instead of the parallel market which aggravates inflation.

The National Bank also permitted private foreign currency offices to assist importers to get access to hard currency in addition to banks. So far encouraging results are witnessed. The main objective of permitting private finance offices is to discourage people to go to the parallel market to sell their hard currency.

To sustain the availability of hard currency in the market the National Bank of Ethiopia supplies currency through the auction and the winner banks purchase the Dollar.

According to NBC from time to time the bank’s reserving of hard currency capacity is increasing. The number of diaspora who opened bank account to deposit their money in hard currency is increasing and the previous restriction in transacting the money has been relaxed; this again motivated them to deposit more money.

More than 17 private and public banks engage in financial business and after the introduction of the floating system, they are empowered to mobilize their own hard currency and supply to the market. Many customers currently can easily access any bank to get loan by opening letters of credit for the importation of goods. In addition to traders industrialists also could obtain hard currency with no bureaucratic hurdles.

Recently, the Commercial Bank of Ethiopia (CBE) has announced the disbursement of $122.5 million in foreign exchange to its customers to support the country’s import trade. This move is part of the bank’s ongoing efforts to ensure the smooth functioning of Ethiopia’s foreign exchange market and to meet the increasing demand for foreign currency by businesses involved in import activities.

The bank revealed that it had reviewed a total of 711 foreign exchange requests submitted by its customers. Of these, 98 percent have been successfully addressed, with $122.5 million allocated to fulfill the approved requests. The remaining requests are under additional verification, and the bank has assured that those customers will be informed shortly once the verification process is complete.

CBE further emphasized its commitment to providing foreign exchange to meet the needs of its customers, particularly for import-related transactions, which are crucial for the stability of the Ethiopian economy. The bank noted that it is well-positioned to continue responding to customer requests in a timely manner.

This substantial disbursement follows a period of heightened demand for foreign currency in Ethiopia, driven by increased import needs and broader economic challenges. The allocation of $122.5 million reflects the bank’s ongoing efforts to address these challenges and ensure that businesses have access to the foreign exchange they require for their operations.

The Commercial Bank of Ethiopia plays a key role in managing the country’s foreign exchange reserves and facilitating trade-related transactions, making this allocation a critical step in supporting the national economy.