Addis Abeba, Sep 30, 2025 (Addis Standard/All Africa Global Media via COMTEX) --
It has now been over a year since Ethiopia formally transitioned from a crawling peg exchange rate system--in place for more than three decades--to a market-based foreign currency regime. This shift formed a cornerstone of the broader macroeconomic reforms introduced by the government in 2024, aimed squarely at addressing chronic foreign currency shortages and narrowing the yawning gap that had long existed between the official exchange rate and the parallel (black) market.
In the early months following the reform, the results appeared promising. By September 2024, the government reported a dramatic contraction in the premium between the two markets: what had once exceeded 100% had plummeted to just 4% within a single month. Mamo Mihretu, then Governor of the National Bank of Ethiopia (NBE), publicly remarked at the time, "The significance and influence of the parallel market are diminishing and weakening." His statement captured the confidence that had begun to take root among policymakers and market participants alike.
Yet that optimism proved short-lived. The single-digit premium held only until December 2024. By early May 2025, the gap had quietly but steadily widened again--climbing to approximately 17%. This resurgence signaled that, despite the government's determined efforts to stabilize the macroeconomic environment, the parallel market had not vanished; it had merely retreated, then regrouped. As of today, the premium remains elevated, underscoring the enduring resilience of informal currency trading and the complex, deeply rooted challenges that market-based reforms alone have yet to fully resolve.
In response to the unwelcome resurgence of the foreign exchange premium, the Ethiopian government has opted for a heavy-handed approach--launching a sweeping crackdown targeting individuals and entities allegedly involved in illegal foreign currency transactions. Central to this effort has been the freezing of bank accounts, a measure intended to deter participation in the parallel market and reinforce the authority of the formal financial system.
The campaign began in early August 2025, when the NBE issued a stern public warning to domestic businesses and members of the Ethiopian diaspora, urging them to cease all dealings in the informal forex market. Framed as part of a broader initiative to "stabilize" the country's financial system and stem illicit currency flows, the announcement carried unmistakable threats: violators risked asset confiscation, and the NBE pledged to coordinate with international authorities to target offshore money transmitters operating beyond Ethiopia's legal reach.
Shortly thereafter, the Financial Intelligence Service (FIS) revealed that the bank accounts of 138 individuals--identified through sustained surveillance--had already been frozen. According to the FIS, these suspects were accused of deliberately circumventing the formal banking system, conducting large-scale currency transactions outside legal channels, and thereby fueling volatility in the exchange rate.
The pressure has only intensified since. Just last week, the FIS announced the freezing of an additional 123 bank accounts, bringing the total number of targeted individuals to 261 in a matter of months. The agency emphasized that this escalation is part of a broader, more aggressive enforcement strategy aimed at dismantling the parallel forex market. Surveillance has been expanded, and authorities have signaled that more names--and more freezes--are likely to follow.
Yet this turn toward punitive enforcement raises troubling questions--not least because it appears to contradict the very philosophy underpinning Ethiopia's transition to a market-based foreign exchange regime. That transition was sold, in part, on the promise of reduced state intervention--of allowing supply and demand, not bureaucratic decree, to determine currency value. This creates a paradox where the very tools of state control that the government sought to abandon are now being used to enforce the new system.
Managed float, not true market
Before assessing the implications of the government's recent crackdown on individuals and entities allegedly involved in illegal foreign currency transactions, it is essential to first clarify what is--and what is not--meant by the so-called "market-based" foreign exchange regime.
Contrary to the official narrative that Ethiopia has "fully transitioned" to a market-driven system, the reality on the ground tells a different story. What exists today is not a true free-floating exchange rate regime--where currency value is set solely by supply and demand--but rather a managed float, or more accurately, a controlled and administratively guided system. The NBE, acting on behalf of the government, continues to play a decisive role in determining the exchange rate, allocating scarce foreign currency through foreign exchange auctions, and restricting access to hard currency for importers, businesses, and even licensed financial institutions.
In reality, Ethiopia has yet to embrace a true market-based exchange rate system."
To grasp the significance of this distinction, it's vital to understand the fundamental difference between two types of systems: a fully floating (true market-based) exchange rate regime and a managed float (or regulated market-based) system.
In a true market-based system, the exchange rate is determined exclusively by the forces of supply and demand in a transparent, liquid, and open market. There is no administrative fixing, no rationing of forex, and no behind-the-scenes intervention by the central bank to prop up or suppress the currency's value. Transactions occur freely through regulated financial institutions, with prices reflecting real-time market sentiment. Central banks may monitor the market, but they do not manipulate it. Under such a regime, parallel markets either don't exist or are negligible--because there's no incentive to trade outside official channels when those channels are efficient, accessible, and reflect true market prices.
Under a regulated market-based system, on the other hand, the exchange rate is nominally "market-determined," yet the central bank retains the authority--and often makes use of it--to intervene. This might involve buying or selling foreign reserves to smooth volatility, setting indicative rates, or quietly directing banks on whom to allocate forex. Such systems are common in emerging economies that have liberalized their exchange regimes without first building the institutional depth, market liquidity, or regulatory transparency needed to support a true float. In these cases, the "market" is only partially free--and often, dysfunction follows. When official channels can't meet demand, or when the administered rate diverges significantly from underlying economic realities, parallel markets inevitably emerge. And when they do, authorities often respond not by fixing the system but by cracking down on the symptoms.
In reality, Ethiopia has yet to embrace a true market-based exchange rate system. Instead, it continues to operate under a tightly managed framework where distortions and restrictions foster the very parallel markets the government is attempting to suppress. A truly market-based regime would require far-reaching reforms, including full current account convertibility, the removal of foreign exchange allocation mechanisms, and the liberalization of the banking sector to enable genuine price discovery.
Inside Ethiopia's FX crackdown
The Ethiopian government's recent crackdown on individuals and entities accused of engaging in illicit foreign currency activities--accompanied by the freezing of their bank accounts--marks a forceful attempt to rein in the thriving parallel market. Officials argue that such measures are necessary to channel more foreign exchange through regulated banking systems, thereby reducing distortions such as artificial shortages and inflated premiums that have long plagued the forex market.
From the government's perspective, this operation is not merely administrative but strategic. By labeling these actors as "economic saboteurs," authorities are framing them as individuals deliberately undermining the newly introduced market-based system. The crackdown, therefore, is presented as an essential step to stabilize the currency regime and demonstrate state authority in the face of widening gaps between the official and black market rates.
It also reflects a deeper reality: the government's reliance on enforcement to compensate for the limitations of market adjustment. By freezing assets, discouraging informal transactions, and publicly identifying suspects, the authorities are signaling that they are willing to police the system rather than allow market forces alone to dictate outcomes. In this sense, the crackdown functions both as evidence of regulatory resolve and as an implicit admission that structural reforms have yet to deliver the intended stability.
More broadly, the episode underscores a fundamental tension at the heart of Ethiopia's reform. On one hand, officials speak the language of markets: flexibility, price discovery, and reduced intervention. On the other, they act with the instincts of control: enforcement, restriction, and administrative steering. This contradiction is not incidental--it's systemic. It suggests the transition is not yet a transition to a free float but rather a managed FX regime. The government is not stepping back from the market; it is attempting to orchestrate it--using regulatory power to nudge, punish, and suppress outcomes it deems undesirable. That's not market-based reform. That's managed adjustment with enforcement tools.
Bottlenecks stifling forex reform
Beyond exposing this philosophical dissonance, the crackdown underscores a sobering reality: Ethiopia's path to a genuine market-based exchange rate system is encountering formidable obstacles. These are not surface-level glitches. They are structural bottlenecks, deeply embedded in the economy's architecture. Five key challenges stand out.
A persistent shortage of foreign currency remains at the heart of the problem. The black market thrives because the formal system cannot--or will not--meet demand. Even with a more flexible exchange rate, if the supply of foreign currency from exports, remittances, foreign direct investment, loans, and aid continues to lag behind what businesses and individuals require, the parallel market will remain the only viable alternative. It is simple economics: scarcity creates premiums.
Officials point out that Ethiopia earned $32 billion in foreign exchange during the 2024/25 fiscal year--a seemingly impressive figure. Yet volume alone does not resolve the crisis if access is rationed, delayed, or politicized. Importers, manufacturers, and even health institutions report waiting weeks for dollar allocations--and often receiving none at all.
Last year, the NBE pledged to inject liquidity through biweekly forex auctions, a theoretically sound mechanism. Yet, by mid-2025, those auctions had become irregular and were frequently canceled without explanation. When the formal pipeline dries up, the black market becomes not a crime but a lifeline.
The black market does not exist in a vacuum; it exists precisely because the official system is failing to operate as it should."
Equally damaging is the erosion of trust and confidence. Three decades of rigid controls do not vanish overnight, and distrust runs deep. Many businesses and individuals--scarred by arbitrary allocations, abrupt policy reversals, or lost savings from past devaluations--still see the black market as faster and more reliable. Even if the official rate improves, the memory of scarcity lingers.
In times of uncertainty, people do not simply seek better prices--they seek certainty. This lack of trust fuels destructive behaviors such as currency hoarding. When people believe the Birr will continue to depreciate--and recent history gives them little reason to think otherwise--they hold onto dollars rather than spend or reinvest them. This speculative hoarding shrinks the available supply, pushes parallel rates higher, and turns fear into a self-fulfilling prophecy. The market reflects not only fundamentals but also psychology--and the prevailing psychology is one of caution, not confidence.
Compounding these challenges are transaction delays and bureaucratic friction. Liberalizing the rate is not the same as liberalizing the process. Even if the rules on paper allow more open trading, the reality remains mired in red tape: delays in approvals, endless paperwork, banks that promise allocations but fail to deliver, and licensing hurdles that block new players from entering the forex market. For time-sensitive importers, the informal market often provides a deal within hours, compared with weeks in the formal system.
Policy distortions add to the strain. The NBE still imposes a 2.5% commission on all forex sales--effectively a hidden tax that discourages transparency. Interbank liquidity remains shallow, limiting banks' ability to serve clients. Transaction costs are high, and settlement is slow. These inefficiencies are not trivial; they signal a system that is not truly open. And when the system is not open, people inevitably find ways around it.
Inflationary pressures further aggravate the crisis. While Ethiopia's 12-month inflation rate has declined from a staggering 34.5% in August 2022 to 16% by June 2025, this headline figure conceals a harsher reality. Cumulative inflation over the past five years (2020/21-2024/25) has eroded purchasing power by roughly 212.65%. That is not just a statistic--it is a lived experience for every Ethiopian household. When prices triple within half a decade, faith in the local currency collapses. High inflation does more than burden consumers; it accelerates dollarization. Why hold Birr when its value steadily evaporates? The U.S. Dollar becomes not merely a medium of exchange but a store of value--a hedge against the state's inability to preserve the currency's worth. This is not irrational behavior but rational survival, and it adds further fuel to the fire of the parallel market.
Perhaps the most critical bottleneck--and the least discussed--is Ethiopia's continued restriction on current and capital account convertibility. True market-based forex systems require that residents and businesses be able to freely buy and sell foreign currency for legitimate trade, travel, investment, or savings--without prior government approval. Ethiopia is not there. Not even close.
Without full convertibility, the market remains artificially segmented. Dollars earned abroad can't always be repatriated freely. Profits can't be easily remitted. Travel allowances are capped. This doesn't just constrain economic activity--it creates massive incentives for circumvention. The black market does not exist in a vacuum; it exists precisely because the official system is failing to operate as it should.
Conclusion
Ethiopia's transition to a market-based foreign exchange regime was envisioned as a bold step toward modernizing its economy and resolving the distortions that had plagued its currency system for decades. Yet the reality on the ground reveals that this shift remains incomplete.
The resurgence of the parallel market is less a symptom of defiance than a reflection of unmet needs. Businesses and households turn to informal channels not out of preference, but because the official system fails to deliver. Cracking down on individuals and freezing accounts may curb illicit transactions in the short term, but these measures do not address the structural imbalances that created the parallel market in the first place. As long as scarcity, inefficiency, and distrust dominate the formal system, enforcement alone will struggle to bring lasting stability.
Ultimately, the government faces a critical choice: to double down on administrative control or to commit to the deeper reforms necessary for a functioning, truly market-based exchange rate regime. The former path risks perpetuating the cycle of repression and resistance, where parallel markets adapt faster than policies can contain them. The latter, though more difficult, offers the promise of durable stability--one rooted not in fear of enforcement but in confidence in the system itself. For Ethiopia, the credibility of its macroeconomic reform agenda will be judged not by announcements or crackdowns, but by whether its foreign exchange regime can finally win the trust of its citizens and deliver the efficiency of a real market. AS
Editor's Note: Samson Hailu, the author of this commentary, holds a Master of Business Administration with a specialization in finance and a Bachelor of Arts in economics. He can be contacted at [email protected]
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