Traders assert that the high commission demands from banks on the foreign exchange market may hinder the flow of hard currency to the black market, where smaller percentages are charged for the sale of foreign exchange. One solution to lower the commission charge rate that goes to correspondent banks is to use the guarantee of international partners.

Since the FX market opened last week, banks have been setting their own rates, which are increasing daily in order to reduce the purchasing rate with the parallel market. This has been commended by the governor of the National Bank of Ethiopia (NBE), Mamo Esmelealem Mihretu.

A day after the first foreign exchange auction in over 20 years, he remarked, “We are happy to see significant progress towards exchange rate stability over the past week, as well as a significant narrowing of the gap between bank exchange rates and parallel market rates.”

Traders and market specialists, including employees of certain banks’ forex bureaus, have noticed that the rate at which banks are selling foreign currency is sharply rising compared to the rate at which they have set to purchase it.

According to them, banks are now charging a fee of around 10% on foreign exchange sales, which they claim is excessively costly when compared to the parallel market.

“Black market players would leverage the advantage to continue their parallel business, which goes against the government strategy of shrinking the illegal exchange market with the new reform,” they expressed their concern, stating that “banks have to reduce some commission fees.”

According to industry experts, the commission fees for the parallel market are far less than what the banks are currently requesting.

“The commission fee that banks are demanding for currency is unseen anywhere else in the world,” a prominent businessman who wishes to remain anonymous told Capital.

Furthermore, experts have stated that in order to achieve the desired benefits of increasing the availability of hard currency through the legal system, the NBE must reduce the fee it charges for FX transactions immediately.

Since May 2022, NBE has been taking 2.5% of FX sales as a fee.

Former top banker Eshetu Fantaye, who currently consults with several local and foreign organizations and firms, mentioned that the forex transaction fee may be a government subsidy derived from traders to fund its operations.

The NBE fee distorts the market by suggesting that there are two rates. When the black market offers a cheaper rate for international transactions, particularly those originating from regions with lax rules, the transactions will gravitate towards the lower-rate provider.

Therefore, NBE should waive its fee in order to establish a single rate. According to a financial sector expert, the NBE charge may provide an opportunity for the parallel market to continue, as 2.5 percent is a high cost for large cash amounts against document trades, letter of credit, and remittance.

The expert stated, “Since it does not play a role in the transaction, the 2.5 percent NBE charge that banks are required to levy on exchange transactions should be discontinued. Instead, a service fee should be applied to the foreign currency that the central bank sells to banks.”

Eshetu recalled, “The International Monetary Fund (IMF) and the Ethiopian authorities have discussed that the government promised to remove this charge after the program ends.”

According to the terms of the agreement with the authorities for the economic reform program, which will be completed in four years, the IMF stated that the authorities will take action to eliminate the multiple currency practice (MCP) and exchange restrictions during the program period. They will also review the commission that the NBE charges after the full IMF Article VIII assessment.

With regards to the banking commission, Eshetu stated that currently, banks participate in the spot market without offering any risk mitigation services to their clients. He added, “So, the cost of providing foreign currency is very minimal, implying that the bank’s fee is unnecessary.”

“Banks are aware of their expenses; for example, they are currently more likely to invest their liquidity, which they will supply as a high-interest, ninety-day short-term loan that they will lock in by purchasing foreign exchange. Since the commission charge is determined by the market interest rate if the loan is supplied, it will be determined by the ninety-day cost of impact,” the expert said.

He advised banks to do assessments in order to determine the cost of letters of credit (LCs).

He emphasized that banks must offer a service that shields clients from fluctuations in foreign exchange rates over the course of ninety days.

For example, if a product is now worth 100 birr, but after banks settle the LC, it can reach 120 birr, with a 20 birr differential that would be passed on to customers.

“Banks should implement risk-mitigating instruments to prevent it from happening.”  He said that banks should focus on their hedging strategies, participate in the forward market, and take additional precautions to safeguard their clients.

“However, when it comes to spot buying and selling rates, the assumption of the cost of funds varies from bank to bank. For example, in certain banks, time deposits and savings account balances make up the majority of the current account balance sheet, which will increase the cost,” he continued.

The cost of hard currency is also significantly influenced by the banks’ relationships with correspondent banks, according to Eshetu.

“The correspondent banks charge certain boutique banks extremely expensive fees since these new and tiny banks might not have many transactions,” he says “In addition, foreign exchange translation fees are another expense incurred by international partners.”

When it comes to LC and cross-border payments, the charges imposed on large and small banks differ.

Eshetu, however, emphasized that the nation has been going through a difficult time lately because of problems with foreign exchange and debt restructuring, which have an impact on the nation’s sovereign rating, which is inferred by financial institutions.

“This is one of the causes of the ten percent in LC charges and cross-border payment fees.” He said, “The majority of the charges are not secured by local banks; rather, they go to foreign partners.”

He predicted that after the debt is restructured and fresh funding begins to enter the nation, the issue would be resolved gradually. He recommends using the Multilateral Investment Guarantee Agency (MIGA) guarantee of the World Bank as an urgent fix to reduce the LC costs generally.

Similar to this, as foreign correspondent banks get the majority of the LC costs, negotiating an expedient solution through the International Finance Corporation’s (IFC) guarantee is vital. According to the most recent announcement, the World Bank has stated that it is committed to helping Ethiopia achieve its goal of becoming a middle-income nation.

“Over the next three fiscal years, IDA expects to provide approximately USD 6 billion in new commitments and support economic reforms through fast-disbursing budget support,” the statement stated.

According to the statement, MIGA aims to increase its involvement, particularly through the World Bank Group Guarantee Platform, while IFC plans to contribute around USD 2.1 billion.

Subject to the Board’s approval of new operations and availability of IDA resources, this implies a total financial package of over USD 16.6 billion in undisbursed and future commitments available over the next three years.