(Bloomberg) -- Trading in Ethiopia’s currency has almost evaporated in the parallel market, with residents hoarding dollars on expectations that the birr will weaken further after the government allowed it to trade freely.
Money changers were willing to pay 115 for a dollar in the parallel market but there were hardly any sellers, according to 10 street traders who asked not to be identified because dealing in foreign-exchange outside official channels is illegal. The currency was trading at 110 against the greenback on Friday on the street, according to the traders.
The birr depreciated 28% this week and was trading at 80 against the US currency on Wednesday, according state-run Commercial Bank of Ethiopia.
“It’s crucial for the government to send a clear signal of its intentions and ensure that the official rate aligns with the parallel market,” said Tewodros Makonnen, senior country economist for Ethiopia at the International Growth Centre.
Tight government control over foreign exchange has resulted in parallel markets in countries across Africa — from Nigeria to Zambia — hurting the ability of companies and individuals to buy overseas currencies. In Ethiopia, clothing boutiques to jewelry shops often double up as money changers because official rates — until Monday — were administered by the central bank, making access difficult.
Ethiopia on Monday allowed the nation’s currency to trade freely, a key move needed to secure funding and debt relief it’s been negotiating with the International Monetary Fund. The IMF announced a $3.4 billion program hours later, which was followed by a funding pledge by the World Bank.
Dollar inflows into the nation have slowed in recent years. A two-year civil war in Ethiopia’s north also spooked investors and forced concessional lenders to pause aid, denying the nation much-needed funds.
As a result, official channels rarely have sufficient dollar supply, forcing Ethiopians to search for foreign-exchange on the street.
Residents have to declare amounts above $4,000 and deposit any cash into forex accounts or convert them into birr a month after any overseas travel. Exporters of commodities such as coffee could only hold on to 40% of their foreign earnings, and were expected to exchange the rest into birr. That threshold’s been increased to 50%.
A street trader who used to get five clients each day hasn’t had any customers this week.
Ethiopia’s central bank didn’t respond to queries seeking comment on the parallel foreign-exchange market.
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