Post Floating: Are Businesses Staying Ahead of the Curve?

The recent shift to a market-based exchange regime is affecting businesses across all sectors, from small enterprises to large corporations. Exporters and importers are particularly feeling the impact as they navigate a new system where the birr’s value is determined by market forces, not the central bank. This change has introduced new challenges and opportunities, which force businesses to adapt quickly. The personal stories and challenges of those on the front lines reveal the intricate ways these changes are shaping their lives and businesses.

The business environment in Ethiopia is facing significant challenges due to the devaluation of the birr and the imposition of a 14% credit cap, which severely restricts access to capital. These factors are collectively straining the financial health and operational capacity of businesses, making it difficult for them to secure the necessary funds to sustain and grow their operations. This pressure will likely hinder the success of the floating currency regime, as it may exacerbate inflation, reduce market confidence, and limit the economic benefits that a floating exchange rate is intended to bring.

Getahun Sitotaw, Finance and Procurement Manager at Belayab Motors, noted that while recent reforms have improved foreign currency availability, demand is decreasing due to constrained working capital. He explained that the 14% credit cap, coupled with the devaluation of the birr, is making business operations challenging and pushing consumers to focus only on essential goods. “One noticeable impact of the reform is the rise in imported goods’ prices. Currently, we’re only selling cars from our existing inventory,” he shared.

He also expressed concerns about a potential downturn in the future market. “In the past, consumers responded positively to price increases, but with reduced purchasing power, their reaction has shifted negatively,” he explained.

“Local businesses are feeling the squeeze as competition grows, and many worry they’re not ready to keep up with international players,” said Samson Tizazu, Business Partner at Proma Partners PLC. “On top of that, we’re seeing concerns about whether our regulatory framework can truly support this new market landscape. Bureaucratic red tape, outdated systems, and inefficiencies in both government and some private sectors are holding us back, making it harder to implement the policies we need for a thriving economy.”

Despite these challenges, Samson noted that this shift has created opportunities for foreign investment, spurring innovation and bringing a wider range of goods and services that can boost economic growth and improve consumer options.

Following the shift to a free-market system, one would expect a noticeable gap between the supply and demand of foreign currency. Yet, the opposite seems to be occurring. Although it’s only been a short time since the shift, the market is behaving unusually.

According to Samson, fintech companies and international corporations are major disruptors in the market, leveraging technology to offer alternative financial services while introducing competitive pricing and innovative products. These entrants are reshaping consumer expectations and pushing traditional business models to adapt.

After the birr was floated, the National Bank of Ethiopia (NBE) took practical steps to support market stability and ensure fair access to foreign exchange. To help manage liquidity, the NBE held a Special Foreign Exchange Auction, giving banks an equitable opportunity to access forex and promoting market steadiness. Additionally, NBE launched an initiative called “Debo” to encourage the use of formal remittance channels, making it easier for the Ethiopian diaspora to support the nation’s growth. Through Debo, NBE also introduced Unite.et, a platform designed to simplify virtual account openings and provide easy access to banking services for diaspora members.

Additionally, the NBE imposed a 2% cap on the spread between the buying and selling rates of foreign currencies to enhance market transparency and reduce arbitrage. The NBE has also mandated daily reporting of significant forex transactions and implemented an electronic trading platform for inter-bank transactions to improve efficiency. These measures aim to promote a more competitive, transparent, and stable foreign exchange market in Ethiopia.

Getahun appreciated the NBE’s decision to enforce a 2% cap on the spread between buying and selling rates for foreign currencies, viewing it as a positive step towards reducing the price of foreign currencies. However, he also noted that banks may adjust to this cap by increasing service charges elsewhere to offset the reduced margins.

“The National Bank of Ethiopia (NBE) has implemented measures, such as the 2% cap on foreign currency spread rates, which can be regarded as a double-edged sword,” said Samson Tizazu. He noted that while this cap aims to enhance market stability by preventing excessive spreads that could deter foreign investment, it may also create challenges for financial institutions that rely on wider spreads for profitability. Overall, he views these regulatory actions as opportunities to foster a more stable and predictable market environment, provided they are executed with careful consideration of the broader economic context.

Looking ahead, he indicated that the long-term market landscape is expected to be characterized by greater integration into the global economy, presenting both growth opportunities and challenges related to competition and regulation. To ensure market stability, it is essential for the NBE and other regulatory bodies to strengthen frameworks that support fair competition, improve access to foreign currency for small and medium enterprises, and promote innovation in financial services to meet changing consumer needs and technological advancements.

Shifting to a market-based foreign exchange system is a bold move for Ethiopia’s economy. While this change undoubtedly can help drive growth and bring in investments, it’s important for the National Bank of Ethiopia (NBE) to monitor market stability closely. Balancing the interests of international lenders with the economic realities faced by the public is essential. The NBE should focus on fair regulations that support growth and make sure that everyone benefits from this new system.