Potential Drivers of Post-Reform Parallel Market Premium: Federal Democratic Republic of Ethiopia

Selected Issues Papers, July 30, 2025

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A comparative analysis of Ethiopia with Angola, Egypt, and Nigeria highlights three structural factors that may be sustaining the parallel market premium despite exchange rate unification.
Ethiopia’s conditions most closely resemble those of Angola during its transition to a more flexible exchange rate regime, where a significant parallel market premium persisted.

Three structural factors identified as likely sustaining the parallel market premium:
- Some remaining current account restrictions, including a 2.5 percent commission payable to National Bank of Ethiopia (NBE) on foreign exchange (FX) sales.
- A tightly closed capital and financial account coupled with low returns on Birr denominated assets.
- An underdeveloped financial market, lacking hedging instruments and dominated by a single bank, which weakens competition and reduces market efficiency.
While each comparator case (Angola, Egypt, Nigeria) has distinctive features, Ethiopia’s pattern most closely resembles Angola’s historical transition experience.

Exchange rate unification alone may be insufficient to eliminate parallel market premia when:
- Current account restrictions remain in place (e.g., commissions on FX sales).
- Capital and financial accounts remain tightly closed, limiting arbitrage and diversification.
- Domestic financial markets lack depth, hedging instruments, and competitive intermediation.

Address remaining current account restrictions that directly affect FX transaction costs (for example, the 2.5 percent commission payable to NBE on FX sales).
Gradually liberalize capital and financial account openness to improve arbitrage opportunities and returns on domestic assets.
Develop financial market infrastructure to introduce hedging instruments and enhance competition among banks to improve market efficiency.