Conflicting reports about the actual dearth of the foreign currency shortage in Ethiopia continues to roar in the financial sector. And, the International Monetary Fund (IMF) became the latest organization to speak out on the matter estimating the official forex reserve held at the central bank to be equivalent to imports over a two-month period. During the successive weeks before the passing away of late PM, commercial banks in Ethiopia, including the state-owned giant Commercial Bank of Ethiopia (CBE), were seen unable to entertain any letter of credit services from their customers. As the problem started to persist in the weeks following, pundits and members of the trading community started to express fears that the official forex reserve accounts of the country might have been depleted severely. Nevertheless, others argued that this was unlikely, citing the excess reserve accumulation that was announced just a year earlier.
However, IMF weighed in the matter last Thursday, saying that the central bank still has reasonable amount of forex reserve in its vault which is enough to finance two months of imports for the country, refuting other reports of much severe shortages. Jan Mikkelsen, resident representative of the IMF, told reporters that official data from the Ethiopian government indicated that foreign currency cache is worth two months of imports. But, the Fund and the government have agreed to put a stop to the aggressive forex sales to commercial banks to maintain the reserve level at a reasonable threshold, he explained.
It is to be recalled that last year the government had made a decision to aggressively sale foreign currency to commercial banks following up on the an excess reserve accumulation that reached an amount worth three months of import. The process dubbed forex sterilization sought to reduce the money supply which was exerting negative pressure on inflation. According to the late PM’s explanations to the House last November, the money supply expansion by itself partly caused the excess reserve build-up the previous year, and hence the decision to quickly get rid of the reserve would amount to sucking out the excess birr pumped into the system.
We agreed there would be no more sales of foreign currency from the national reserve accounts, Mikkelsen said. “And further provision of forex to the inter-banking currency market would be based on additional foreign currency inflow to the country such as export proceedings and aid,” he explained.
“In fact, we also agreed on the need to gradually build on the reserve account to reduce risk and vulnerability to external shocks.”
However, the shortage that was observed at the time is merely a temporary phenomenon, according to the resident representative. He said that at the time the government stopped forex sales to banks, other factors such as low export proceedings and huge demand of GTP projects lined up for the next year piled up to exaggerate the shortage. “We also learned that some of the forex demands are really artificial in the sense that most of such LC requests are more than what the importers need,” Mikkelsen argued.
“The difference between the official and parallel market exchange rate is also another indicator of the existence of a real shortage,” he continued. But the spread between the two rates is not more than 3 percent, indicating the gap was not that serous, he argues forcefully.
In the past few weeks, the financial sector was overtaken by various theories as to what caused the forex havoc. Some went further and said that the reserve had depleted to three months of import coverage. Meanwhile, others had theories that say the forex shortage was caused by a deliberate move to halt the currency sales by the central bank until the commotion at the port of Djibouti was cleared. All in all, the resident representative feels that the forex issue will be resolved in the coming months.