When Eyob Tekalign, Governor of the National Bank of Ethiopia, met with diaspora remittance operators in Washington, DC, earlier this month, his remarks combined optimism with unease. Remittances were growing, exports were surging, and the country’s foreign-exchange reserves were inching upward. Gold and coffee, the traditional pillars of Ethiopia’s trade, were enjoying record earnings, while money sent home from abroad remained a crucial lifeline. Yet beneath the upbeat tone ran a note of warning: the same inflows that sustain the economy are increasingly slipping through illegal channels.
Last year Ethiopia undertook one of its most consequential macroeconomic reforms in decades. In July 2024 the birr was allowed to float, ending years of a fixed exchange rate that had distorted the economy and penalised exporters. The policy was designed to align the official rate with the market rate, encourage exports, and reduce the appeal of informal money-transfer networks. For a few months, the experiment seemed to work. Export competitiveness improved, and the notorious gap between the official and parallel rates narrowed. But by late summer this year, the spread began to widen again, rekindling old anxieties about the resilience of the new regime.
Ethiopia’s policymakers have blamed illegal money changers—those running unlicensed exchange networks and informal remittance systems known locally as “hawala.” These operators often offer faster service, higher rates, and greater flexibility than the country’s formal banking sector. But they also drain foreign exchange from official channels, undermine the central bank’s credibility, and, in some cases, overlap with contraband and criminal networks.
The scale of the problem is striking. The World Bank estimates that the Ethiopian diaspora sends home more than five billion dollars a year, a figure roughly half the size of the country’s total annual FX earnings. Yet officials acknowledge that as much as a fifth of this may be flowing through informal routes. By one government estimate, the black-market trade in foreign exchange is costing the economy about a billion dollars annually—nearly one-tenth of Ethiopia’s total FX inflows.
But much of the leakage is not occurring in dark alleyways or remote border towns—it is happening within the formal financial system itself. Several of Ethiopia’s largest banks, both public and private, have been repeatedly accused of enabling illegal money traders, knowingly or otherwise. According to senior financial officials, black-market brokers have maintained active accounts in the country’s top-tier banks, processing large volumes of transactions under the guise of import-export operations or remittance facilitation. Bank insiders, often shielded by political connections, allegedly provide the cover that allows these networks to thrive.
The problem is widely acknowledged within government circles, but few tangible steps have been taken. Investigations are launched, committees are formed, yet enforcement rarely reaches senior executives. Insiders say that political sensitivities and fears of destabilising the banking sector have stalled meaningful reform. The result is a credibility gap: while the central bank warns small traders against illegal transfers, many of the largest offenders operate from behind polished glass facades with institutional complicity.
Ethiopia’s experience is not unique. In the past half-century, a number of Asian countries have faced the same dilemma: how to open their economies to global capital and trade while stamping out the informal markets that feed on instability. The successful ones paired liberalisation with credible enforcement.
In Vietnam, for instance, the government confronted rampant underground currency trading following the launch of the Đổi Mới reforms in the late 1980s. Authorities responded with a mix of liberalisation and discipline—tightening supervision of the banking system, mandating registration of all money-transfer firms, and prosecuting unlicensed operators with heavy fines and prison times. Today, under Decree 88/2019, offenders face up to fifteen years in prison and steep financial penalties. A series of coordinated raids in 2024 dismantled major remittance rings in Ho Chi Minh City and Da Nang, seizing millions of dollars.
South Korea faced similar challenges during its industrial take-off of the 1970s and 80s. Its Foreign Exchange Transactions Act prescribes severe consequences for illicit trading, including prison terms of up to seven years and fines that can exceed half a million dollars. The Korea Customs Service recently shut down dozens of exchange firms and referred others for criminal prosecution, reinforcing the perception that rules are not merely advisory.
China has gone further still. Articles 190 to 192 of its Criminal Law define large-scale illegal currency operations as “serious economic crimes,” punishable by life imprisonment and the confiscation of assets. Over the past two years, courts in Zhejiang and Guangdong have handed down double-digit prison sentences to dozens of operators who moved hundreds of millions of yuan through so-called underground banks. The country’s central bank and public-security apparatus now coordinate regular heavy handed crackdowns across provinces.
What these cases share is a commitment to deterrence. Liberalisation was matched by enforcement. Markets were opened, but not left lawless. As a result, these economies achieved currency stability, boosted investor confidence, and narrowed the gap between official and parallel rates.
Ethiopia’s approach is still evolving. The National Bank has established a Financial Intelligence Service to investigate suspicious transactions, freeze illicit accounts, and coordinate with law enforcement. Asset seizures and account suspensions have been authorised, and the governor has promised to pursue criminal charges against serious offenders. Yet enforcement remains inconsistent, and illegal traders continue to operate with relative impunity.
The deeper challenge lies in trust. Many Ethiopians abroad continue to use informal channels because they find formal banks cumbersome and uncompetitive. Black-market dealers, by contrast, offer speed, familiarity, and better rates. Unless the formal system becomes more attractive—through quicker transfers, improved service, and a realistic exchange rate—enforcement alone will not suffice.
Still, time is short. The birr’s depreciation has already pushed inflation above 25 percent, raising the cost of food and imports. The International Monetary Fund estimates that Ethiopia’s reserves are improving but still do not cover the country’s import needs—a fragile buffer for an economy investing heavily in infrastructure and industrial projects. Each dollar lost to the black market further erodes that cushion. This is even made worst when money traders are also involved in contraband, arms, and drug trading.
For Governor Eyob, this is more than an accounting exercise. It is a test of credibility: can Ethiopia persuade its citizens, investors, and diaspora that its new market order is here to stay? His government now holds better data than ever—on remittance flows, suspicious transfers, and geographic patterns of illegal trading. But data alone cannot stabilise a currency. What matters is the willingness to act decisively, even when action risks confronting entrenched interests within the state and banking sector itself.
The path forward will require both firmness and flexibility. Ethiopia must enforce its laws with consistency and transparency, ensuring that illegal traders—and the bankers who enable them—face real consequences. But it must also make legal channels competitive: allowing banks more freedom to set exchange margins, modernising payment systems, and improving customer service for the diaspora. The long-term goal should be to make the formal system not only safer but faster and more rewarding than its underground rival.
If history is a guide, such an approach can work. China, South Korea, and Vietnam all began their ascent from similar instability—currencies under pressure, trade deficits widening, and parallel markets flourishing. They overcame these challenges through a combination of discipline, openness, and institutional integrity. The same formula could yet stabilise the birr.
Ethiopia’s reformers have laid the groundwork. Exports are recovering, remittances are robust, and the will for change exists. The next step is credibility: visible enforcement, financial transparency, and a central bank capable of confronting corruption from within. The birr’s fate will depend less on the mechanics of exchange-rate policy than on whether Ethiopia can muster the political will to clean its own house.
