Ethiopia’s ongoing economic reforms under the Homegrown Economic Reform Program agenda is beginning to stabilize the local currency. The latest foreign exchange auction attracted 131.70 per US dollar marking one of the highest. CNBC Africa is joined by Mered Fikireyohannes, Founder & CEO of Pragma Investment Advisory to unpack that and much more as the central bank announced results of the foreign exchange auction.
ongoing economic reforms under the Homegrown Economic Reform Program agenda is beginning to stabilize the local currency. The latest foreign exchange auction attracted 131.70 per US dollar marking one of the highest. CNBC Africa is joined by Mered Fikireyohannes, Founder & CEO of Pragma Investment Advisory to unpack that and much more as the central bank announced results of the foreign exchange auction. We've seen some major movements on the biir. Just walk us through what are you seeing on your end in terms of the appreciation of the currency? Absolutely, Abiy. As always, it's always a pleasure to be on the show. Yes, as you rightly mentioned, under the Homegrown Economic Reform Plan, Ethiopia has floated its currency. It has been now nine months since it floated the currency. And as part of that, the National Bank of Ethiopia, the central bank, is the sole buyer of gold, which has been mined through artisanal mining, mostly through artisanal mining. So since in the past nine months, it has been buying actively from the market and has been collecting gold and selling it in the international market. Due to that, the central bank's balance sheet has been flooded with a number of quite amount of foreign currency, mostly in USD. So as part of offloading some of the foreign currency in USD, it has been engaging in auction. So yesterday, it has conducted a $50 million auction, which resulted in a weighted average of 131 bir. Compared to a month ago, compared to a month ago's auction, it floated around $60 million a month ago, and it yielded around 135 bir. So it seems to be that bir is appreciating by close to up to 300 basis points. So the result was that 15 banks were participating in the auction. The numbers has quite reduced from the previous men's auction participants. So what the central bank is trying to do is to ease the market in terms of putting the foreign currency in the market, and then at the same time to make sure that the market has enough foreign currency, and then to make sure that bir is stabilized. So in our view, one of the things that, one of the purpose of the central banks to do so is, in the quite couple of months, we've seen a kind of a lack of transparency among the daily exchange, among the banks. And the banks, sometimes they start to charge up to 7 to 10 percent on foreign currencies of opening of a letter of credit. So the central bank governor came in and made an announcement saying that the central bank will correct, will take corrective measures in making sure that the commissions rate are appropriate and are reasonable. Because of that, it was quite distorting the price of bir, because what you see on the bank, on their daily exchange, it would say 130 bir, but you go there and you negotiate with the bank, you might get bir up to 140 bir. So the central bank governor came in his announcement, came and said, we need to correct this. And as part of that, and to make sure the market is at peace, the central, the governor also announced that it will continuously auction USDs for the next coming three months up to the end of June on a biweekly basis. So due to that, I think, in our view, this will inevitably will make foreign currency more available to the market, and we'll appreciate bir, and we're starting to see that as well. Quite some positive news there. After nearly last couple of months, we did see the bir performing quite dismally, falling by about 30 percent. But really, who are the beneficiaries when you see the bir strengthening? What is some of the market watchers saying on this? Yes, I think everyone is the benefit of this. It is very commendable that the central bank came in and said, remove the lack of transparency in terms of buying and selling among the banks. I think that is very much important. That is a very correct measure to do so. And more importantly, I mean, as a country, we would want the bir to stabilize. We would want the market to ease in terms of, you know, in terms of from a predictability perspective, in terms of having foreign currencies. So to give confidence for the market by the central bank, I think that is very much commendable. So the benefit is, it goes everywhere, you know, in terms of the government paying its foreign currency debt, the country buying its fuel, you know, fertilizer, what have you. It definitely ease the market in terms of creating a predictability. And then at the same time, creating stability within the foreign currency market. Mind you, you know, Ethiopia is in the process of opening up its banking sector for foreign players. At the same time, the central bank is also implementing a new monetary policy system in play. And then, you know, and then the monetary policy reform is also in transition. So the last thing we need, the last thing we need is an instability in the foreign currency market. So this is definitely appease the market. And the central bank has done a very good job in terms of making sure that the market has confidence. And making sure, and more importantly, taking corrective measures, creating transparency in terms of the buying and selling of foreign currency within the banking system, and also of the overall market as well. And Mireille, just before I let you go, I do know that earlier in February, we did see IMF top brass, including the IMF chief Kristalina Giugieffa, making a visit to Ethiopia. And one of the key issues she did bring up is the reforms are going to be quite significant for Ethiopia's economy when it comes to turning around the economy. But in equal measure, there were concerns that this could be affected by conflict, especially in the Tigray area. And looking at the recent developments, what have these developments done, especially in stabilizing the country? What has the leadership said in regards to this? Because it would wipe away the gains that the BIR is making. Yes, definitely, Abiy. This is a looming risk, and it's also been addressed by IMF. And also, the market is also closely watching this. Believe me, the market is closely watching the development in the northern part of the countries, because, you know, God forbid, if there is any kind of instability, it has a huge pressure on the foreign currency as well. I think on the government side, the government is being very wise in terms of engaging with the political parties and making sure that it would not spill over to another potential conflict. And, I mean, of course, both internally and also externally, people are watching the development closely. But from the government side, one thing we're seeing is the government is trying to handle it delicately. I think the prime minister has addressed it in his recent parliament address that they're trying to make sure that things are appeased and done in an appropriate manner. So, yeah, but it's something to look closely at.
Theme: Stabilization of Ethiopia's currency through economic reforms and foreign exchange auctions
Ethiopia's ongoing economic reforms under the Homegrown Economic Reform Program agenda are showing signs of success as the local currency, the bir, is stabilizing. The recent foreign exchange auction, which attracted a rate of 131.70 per US dollar, reflects this positive trend. Mered Fikireyohannes, Founder & CEO of Pragma Investment Advisory, joined CNBC Africa to discuss the implications of the central bank's foreign exchange auction results and the impact of the ongoing economic reforms. Fikireyohannes highlighted that Ethiopia's decision to float its currency as part of the Homegrown Economic Reform Plan has been instrumental in stabilizing the bir. Over the past nine months, the National Bank of Ethiopia has actively purchased gold from artisanal miners, leading to an influx of foreign currency, mainly in USD. To manage this influx, the central bank has been conducting auctions to offload excess USD. The recent auction of $50 million resulted in a weighted average exchange rate of 131 bir, indicating an appreciation of the currency compared to previous auctions. The central bank's efforts are aimed at both providing liquidity in the foreign exchange market and ensuring the stability of the bir. By addressing issues of transparency and excessive commission rates charged by banks, the central bank is creating a more predictable and stable foreign exchange market. Additionally, the governor announced plans to continue USD auctions biweekly until June to increase the availability of foreign currency and further support the appreciation of the bir. The appreciation of the bir benefits various stakeholders across the economy. From government debt repayment to essential imports like fuel and fertilizer, a stable currency enhances market predictability and instills confidence. As Ethiopia moves towards opening its banking sector to foreign players and implements new monetary policies, a stable foreign exchange market is crucial for sustained economic growth. However, concerns loom over the impact of ongoing conflicts, particularly in the Tigray region, on the country's economic stability. The recent visit by IMF officials, including IMF chief Kristalina Giugieffa, underscored the significance of Ethiopia's economic reforms in transforming the economy. The government's handling of internal conflicts and efforts to prevent further escalation are essential to safeguarding the gains made in stabilizing the bir. In response to questions about the potential risks posed by conflicts, Fikireyohannes emphasized the need for careful management of the situation to avoid any disruptions to the foreign currency market. The government's approach to delicately addressing the conflicts and engaging with stakeholders internally and externally reflects a commitment to maintaining economic stability amidst challenging circumstances. Overall, Ethiopia's progress in stabilizing its currency amid economic reforms signals a positive trajectory for the economy. Continued efforts to enhance transparency, ensure market stability, and manage external risks will be vital in sustaining this momentum and fostering long-term economic growth.
"The appreciation of the bir benefits various stakeholders across the economy. From government debt repayment to essential imports like fuel and fertilizer, a stable currency enhances market predictability and instills confidence."
Ethiopia, economic reforms, currency stabilization, foreign exchange auction, central bank, bir, USD, market stability, IMF, conflicts, Tigray region, economic growth