The Federal Democratic Republic of Ethiopia: Selected Issues

This Selected Issues paper explores potential drivers of post-reform parallel market premium. A comparative analysis of Ethiopia with Angola, Egypt, and Nigeria reveals three key structural factors that may be sustaining Ethiopia’s parallel market premium even after exchange rate unification. First, some current account restrictions remain in place, such as a 2.5 percent commission payable to the National Bank of Ethiopia on foreign exchange sales. Second, Ethiopia maintains a tightly closed capital and financial account, and Birr-denominated assets offer low returns, which limits foreign investment and currency inflow. Third, the country’s financial market is underdeveloped, lacking essential hedging instruments and being dominated by a single bank. This limits competition and weakens market efficiency. Although each country examined has its own specific circumstances, Ethiopia’s situation most closely mirrors that of Angola during its shift to a more flexible exchange rate regime. Like Angola, Ethiopia continues to experience a substantial parallel market premium despite reforms, indicating the need for broader structural changes to enhance market confidence and effectiveness.