Selected Issues Papers

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

By Bryan Gurhy, Kyungsuk Lee, Sandhya Rajyam Garimella

July 30, 2025

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Bryan Gurhy, Kyungsuk Lee, and Sandhya Rajyam Garimella. "Potential Drivers of Post-Reform Parallel Market Premium: Federal Democratic Republic of Ethiopia", Selected Issues Papers 2025, 105 (2025), accessed July 31, 2025, https://doi.org/10.5089/9798229017084.018

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Summary

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: (i) some remaining current account restrictions, including a 2.5 percent commission payable to National Bank of Ethiopia (NBE) on foreign exchange (FX) sales; (ii) a tightly closed capital and financial account coupled with low returns on Birr denominated assets; and (iii) an underdeveloped financial market, lacking hedging instruments and dominated by a single bank, which weakens competition and reduces market efficiency. While each case has its own distinctive features, 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.

Subject: Balance of payments, Capital account, Currency markets, Current account, Exchange rate adjustments, Exchange rate arrangements, Exchange rate unification, Exchange rates, Exchange restrictions, Financial account, Financial markets, Foreign exchange

Keywords: Capital account, Currency markets, Current account, Ethiopia, Exchange rate adjustments, Exchange rate arrangements, Exchange rate flexibility, Exchange rate unification, Exchange rate unification, Exchange rates, Exchange rates, Exchange restrictions, Financial account, Imports, Parallel market premium

Publication Details

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