Experts at the Ethiopian Economics Association have called for better transparency in the foreign exchange market to prevent excessive depreciation, which they warn could worsen food insecurity.

The Association conducted a survey in eight regions and Addis Ababa and Dire Dawa as part of a macroeconomic study, which its experts say discovered strong correlations between exchange rate fluctuations and inflation components—particularly non-food inflation.

The findings suggest that currency depreciation has been a significant driver of inflation, beyond just monetary and demand-side factors.

“This indicates that inflation is not merely a reflection of monetary conditions but also a consequence of deeper structural challenges, including supply-side rigidities and external cost pass-through effects,” reads the study.

The authors describe the exchange rate variation among banks and the spread as “moderate” and “relatively close within the market”.

However, they warn that failing to address supply-side constraints and secure economic diversification will result in continued macroeconomic fragility and inflationary pressure, particularly in response to external shocks and currency fluctuations.

The study recommends narrowing the nearly 20 percent gap between official and parallel exchange rates through improved transparency in the forex market. It suggests reducing administrative controls, improving reserve management through export promotion, incentivizing remittances, and attracting foreign direct investment (FDI) as important tools.

The study calls for measured liberalization to reduce volatility and promote a more efficient currency market.

“Additionally, supporting domestic production, ensuring peace and security, and tailoring responses to regional inflationary trends will help control price pressures and reduce reliance on imports,” it reads.

The authors want to see officials minimize transactional and logistical costs for essential imports like food and fuel, while implementing broader cost-control measures to address inflationary pressures.

Diversifying exports by shifting from raw commodities to higher-value processed goods is also key, according to the study.