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Normal Vs parallel exchange rates drift astronomically apart

Due to the increased demand for foreign currencies, the dollar exchange rate at the parallel market skyrocketed making the official and parallel markets to drift exponentially apart.
In some parts of the city where black market trading takes place, during the week, one US Dollar was selling between 90 to 92 birr. This in comparison to the normal exchange rate was night and day, with differences of 70 to 75 percent.
From Capital’s assessment of the market, importers who specially import cars are buying one dollar for up to 100 Ethiopian birr. With the rising demand of foreign currency, the exchange rate gap between the official and black market went up to 90 percent, on this occasion. The ripple effect was felt as the prices of cars in the country have risen in recent weeks.
According to the exchange rate on September 16, 2022, the official selling price of a dollar was 52.53 birr while it was between 90 and 92 birr in the parallel market.
“It is not something that can be stopped by controlling mechanism,” said Fikadu Digafe, vice governor of National Bank of Ethiopia indicating that there is also a gap between demand and supply.
The foreign exchange provided by the banks is decreasing significantly. In response to excess demand for foreign exchange in the official market, parallel markets for foreign exchange have gained traction. However, the emergence and existence of active parallel foreign exchange market creates several complications to policy makers in their attempt to regulate the external balance.
“We are working to stabilize the situation. NBE is doing an assessment to figure out what the real reason is,” said the vice governor, adding, “It all has to start from knowing the reason.”
It is widely thought that the surging inflation and a shortage of hard currency in Ethiopia are driving up the price of the US dollar on the black market.
According to experts controlling the illegal foreign exchange trade is challenging for the government.
Experts opine for the removing of brokers involved in the currency market through establishing a strong monitoring and controlling scheme, which could help achieve results in a short period of time.
Over the past ten years, the Ethiopian birr has depreciated significantly against the U.S. dollar, primarily through a series of controlled steps. Over the past years, everything has been changing so fast and exchange rates are rapidly fluctuating due to the political uncertainty in the country. The conflict in Northern Ethiopia and the instability in most parts of the country are among the factors that are said to have contributed to the skyrocketing exchange rate of foreign currency.
The government is struggling to control the black market currency exchange, with efforts being unsuccessful.
Two weeks ago, the central bank tried to tighten controls on birr and foreign currency use. Accordingly, foreign residents in Ethiopia who are entering the country from foreign countries had to convert all foreign currencies in their possession to an equivalent sum in birr, through authorized forex bureau. Preferably, such individuals could deposit the foreign currencies into their foreign currency accounts within 30 days of entering the country.
Returning foreign residents possessing foreign currencies above 4,000 dollars have to present a customs declaration, as per the government rule.
Moreover, according to the national bank directive amendment of retention and utilization of foreign currency no 79/2022, banks are required to surrender 70 percent of the foreign currency earnings from export of goods and services, similar to remittance and NGOs who ought to transfer to the national bank.
Exporters of goods and services and recipients of inward remittance get only 20 percent of their export earning in foreign currency after deducting 70 percent to the central bank. The remaining 10 percent is surrendered to the respective bank.

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