The Parallel Market Gap Is Narrowing. The IMF Says Ethiopia’s FX Reform Isn’t Done

The fifth ECF review credits nineteen directive changes and a new interbank platform with narrowing the premium, while flagging bank fees, gold pricing, and import taxes as the distortions still driving traders to the parallel market.

The parallel market premium on the birr fell to around 11 percent by late May, down from a range of 10 to 20 percent that had held since October, according to the IMF’s fifth ECF review, completed by the Executive Board on July 1. The Fund credits a wave of foreign exchange directive changes, alongside FX auctions that supplied liquidity and reduced informal demand, for the improvement. But the same review devotes a full analytical box to explaining why the spread hasn’t closed further, and the list of remaining distortions is long.

What Changed on the Ground

The National Bank of Ethiopia rolled out three rounds of FX measures during the review period. On February 11, it announced nineteen amendments to the FX Directive: services exporters can now hold 100 percent of their export proceeds in retention accounts indefinitely rather than surrendering a portion; banks can enter forward FX transactions without prior NBE approval; exporters can receive advance payment; and approval of external loans and supplier credit was shifted fully to banks. Retail limits eased too, with outbound family remittances now permitted up to $3,000 and advance payments for medical or education expenses allowed up to $20,000. Dividend payments no longer require NBE approval, only supporting documents submitted to banks.

A second round on May 25 and 26 went further on trade finance, authorizing banks to approve letters of credit and cash-against-documents transactions for FX account holders without NBE sign-off, and extending export-permit and documentary-credit authority for China-bound trade to all licensed commercial banks, not just the Commercial Bank of Ethiopia. Separately, the NBE launched an automated interbank FX trading platform on the Ethiopian Securities Exchange to enable more competitive, real-time bidding among banks, and it began publishing full auction results, including the highest and lowest bids and the number of participating banks, for the first time in January.

The central bank also cleared a technical compliance issue: two long-running multiple currency practices, tied to a 2.5 percent commission banks charge clients and a matching 2.5 percent commission the NBE applied on government FX transactions, were eliminated in January and March, respectively, after twelve consecutive months without an impermissible spread.

Why the Gap Persists

The IMF’s own account of what still pushes traders to the parallel market reads like a checklist of unfinished business. Transaction costs remain high: a roughly 4 percent bank fee stacks on top of the NBE’s exchange commission, and the Fund notes banks may be layering in informal costs by cross-selling other products. There is still no formal hedging market, so anyone needing exchange-rate certainty has an incentive to go outside the banking system. Import taxation is steep and layered, with customs duties of zero to 35 percent, a 10 percent surtax, excise taxes ranging as high as 500 percent, and 15 percent VAT, creating an incentive to smuggle goods and source dollars informally to pay for them.

Gold gets its own mention. The NBE is the sole buyer of artisanal gold and pays miners a premium of roughly 5 to 15 percent above international prices, a subsidy the Fund says likely feeds into the parallel exchange rate given gold’s role as a marginal source of foreign currency. The central bank has committed to a plan by the end of September to phase out that premium, tied to its own recapitalization process, with a longer-term exit from the gold market to follow by December.

Bank behavior is a separate concern. Even with a functioning auction system, the IMF observed that banks continue to cluster their bids and the rates they offer clients, language that points toward limited competition rather than a fully price-discovering market. All banks stayed within the central bank’s net open position limits, capped at 18 percent of capital, as of end-April, but interbank FX trading itself remains thin and irregular.

What’s Left on the Reform Calendar

Two exchange restrictions remain in place with the IMF’s temporary blessing: hard ceilings on FX access for travel and for family remittances, both justified on balance-of-payments grounds given reserves still cover just over two months of imports. Two others, a tax clearance requirement for dividend repatriation and an NBE clearance requirement for import permits, have no IMF sign-off and are slated for elimination by the end of the program. A roadmap to deepen the interbank market is due by the end of September, and an assessment of risks around further remittance liberalization, including the potential for capital-control circumvention, has been pushed back to December.

Capital account rules moved mostly in the direction of liberalization during the review period, easing surrender requirements, foreign-currency account access, and bank-issued loan guarantees, though controls on residents investing abroad remain subject to case-by-case approval. The Fund’s message to the authorities was to keep sequencing further capital account opening to conditions on the ground rather than substituting it for other macroeconomic adjustments.

Whether the spread keeps narrowing from here will depend less on any single directive change than on whether banks start competing on price rather than clustering around similar offers, and on whether the NBE follows through on removing its own exchange commission, a step the Fund has tied to the central bank’s broader recapitalization plan rather than giving it a fixed date.