In the wake of Ethiopia's decision to float its national currency, the birr, against major foreign currencies, the country's banks have seized the opportunity to widen their profit margins on foreign exchange transactions.
Data compiled by regional analyst shows that as of August 13th, the average selling-buying rate spread charged by Ethiopian banks has skyrocketed to 10 percent, far exceeding the margins seen in neighboring countries like Kenya (5.2 percent), Tanzania and South Africa (3 percent), Uganda (1.9 percent), and Rwanda (2.6 percent).
"This is deflating, to say the least," said Ayele Gelan, an economist who analyzed the data across banks in East Africa. "What is the NBE [National Bank of Ethiopia] trying to achieve? It's letting commercial banks to charge punitive margins, the largest gap between buying and selling rate in Africa. How can the market-based FX work with this kind of obstacles put in its way?"
This massive disparity has raised concerns among economists and consumer advocates, who argue that Ethiopian banks are unfairly exploiting the birr's 80 percent depreciation to line their own pockets at the expense of the public.
However, bankers have defended their decision, arguing that they are facing increased uncertainty in currency movements since the float and need to adjust rates to account for the added risk.
"The birr has been extremely volatile since we moved to a floating exchange rate. We have to price in that uncertainty and potential for further depreciation," said a banker working for one of the mid-sized banks.
The surge in the spread showed a further increase after the NBE instructed banks to waive commission fees on letters of credit, effectively pushing them to widen their spreads as the primary means of generating revenue from foreign exchange transactions.