Ethiopia’s First Foreign Currency Auction Since Floating Garners Bids near Parallel Rates

The inaugural special foreign currency auction by the National Bank of Ethiopia (NBE) attracted 27 of the 31 commercial banks in the country with successful bids of 107.9 birr (weighted average) against the dollar. Tomorrow’s indicative exchange rate, a non-mandatory figure placed on the central website will be the reflective amount according to NBE’s statement.

Central bank governor Mamo Mihretu relayed his sense of joy in the early success in narrowing the gaps between the official and parallel exchange rates which are around 116 birr against the dollar.

“This is precisely what our macroeconomic reforms aimed to achieve,” the governor said.

He referred to how a significant portion of the foreign currency transaction could move to the banking system helping both exporters with their earnings and businesses with access.

Mamo also suggested that a growing number of banks have been making an increasing level of foreign currency available for their customers by approving past requests and accepting new ones.

The Birr has slid against the dollar by nearly 90pc in the week and a half since the seismic transformation that overhauled the country’s currency regime towards market-determined rates.

Interested banks were invited to submit their bids to the Foreign Exchange Monitoring & Reserve Directorate at NBE before noon today. No single bank is allowed to scoop more than a fifth of the total amount of funds made available during the auction

While country-specific, several nations adopt auctions as a means to bolster foreign currency access and regulate the demand and supply of foreign exchange. The foreign exchange crises faced by many developing countries in the early 1980s led to various modifications in exchange rate regimes. One response was the introduction of an exchange auction.

Under this regime, the central bank regularly sells a specified amount of foreign exchange through a bidding process and buys foreign exchange in the intervening periods at the previous auction-determined rate. The introduction of open market operations by the NBE and its shift towards an interest-based monetary policy complement this arrangement.