Ethiopia’s parallel currency market is driven by offshore financial networks tied to illicit traders, gold smugglers and informal remittance brokers. Exchange-rate liberalisation may narrow the gap, but it will not dismantle the system.
Economists tend to agree on one point: when a currency is allowed to float freely, parallel markets lose their appeal. Arbitrage opportunities disappear, black-market premiums shrink, and capital gravitates toward formal channels. Several readers responding to Abren’s recent reports on illicit financial flows (IFFs) argued that Ethiopia should adopt precisely this approach—abandon administrative controls, allow the Birr to find its natural level, and in the process eliminate the need for crackdowns on illegal money-transfer operators.
As a textbook proposition, this is sound. Yet Ethiopia’s case is more complicated. The country’s parallel currency market is not merely an economic distortion; it is part of a wider, illicit financial infrastructure tied to contraband traders, gold smugglers, extremist networks and diaspora-based informal banking systems with links to Chinese, Turkish and Dubai based shadow bankers. Floating the Birr would correct the price signal. It would not dismantle the system.
A Market Solution to a Non-Market Problem
In countries where financial flows are transparent and security risks low, exchange-rate liberalisation tends to narrow the gap between official and informal rates. Nigeria, Egypt and Pakistan have each experienced temporary convergence after liberalisation—though often followed by renewed divergence when structural weaknesses persisted.
Ethiopia’s black market is structurally different. For many operators, currency arbitrage is only a secondary motive. Their primary business is discretion: providing untraceable financial services to groups and individuals who cannot use regulated channels. Investigations by Ethiopia’s Financial Intelligence Service, UN monitoring groups and regional research organisations portray a system in which dollars circulate through informal networks in Dubai, Turkey and southern China with remarkable speed and opacity. The funds rarely return to Ethiopia.
In such an environment, a free-floating currency would not neutralise illicit operators. It would simply encourage them to re-price their services while continuing to act as bankers for clients engaged in activities ranging from tax evasion, to under invoicing, to arms procurement.
The Missing Dollars
The economic cost of parallel market is significant. The country lacks foreign currency, with reserves periodically falling to precarious levels. Hard currency diverted through illegal money-transfer operators—rather than deposited in banks—never enters the official financial system.
According to a source at the Ethiopian Embassy in Washington, Ethiopian diaspora communities send billions annually in remittances through various channels. A vast majority of that passes through illicit channels. Much of this hard currency is often captured offshore, in banks accounts located in Turkey, China or Dubia. A network of money runners located in country would then electronically deposit cash using these offshore accounts as collateral. For an economy dependent on imports of fuel, medical supplies and industrial inputs, the loss is substantial. Getting this hard currency to funnel through the banking system would do wonders for an economy dependent on imports of fuel, medical supplies and industrial inputs.
Legal money-transfer operators, meanwhile, struggle to remain competitive. A difference as little as ten cents in the exchange rate is enough to push customers toward unregulated brokers who, unconstrained by compliance costs, can offer better terms. The result is a system in which legal channels appear uncompetitive not because they are inefficient but because they are competing with operators who bypass regulation altogether.
The Gold Loop
Gold has in recent years become a major driver of Ethiopia’s black-market currency trade. Small-scale miners sell their gold to the National Bank of Ethiopia (NBE), receive Birr, and then immediately seek dollars from illicit brokers. Because gold prices have been rising, miners and traders are confident they can convert Birr into dollars quickly—so they are willing to accept unfavourably low Birr-to-dollar rates. The hard currency acquired in this way is then moved offshore, compounding the drain on Ethiopia’s reserves.
This dynamic creates a self-reinforcing loop: tighter currency regulation pushes gold traders toward illegal brokers; greater reliance on brokers accelerates the outflow of hard currency; and the resulting dollar scarcity further strengthens the black market. A floating exchange rate alone does not break this cycle. At best it narrows the arbitrage gap; at worst it reinforces offshore dollar hoarding by weakening confidence in the domestic financial system.
Reform Requires More Than Liberalisation
NBE has signaled an interest in exchange-rate reform, and a managed float is likely inevitable as part of wider macroeconomic adjustment. But liberalisation is not a substitute for enforcement. Successful reform requires a dual approach.
The first track is economic. The country will need a more flexible exchange-rate regime, a gradual relaxation of currency controls, improved access to foreign exchange for exporters, and better incentives for diaspora remittances through licensed operators. Without these, the spread between official and parallel rates will continue to invite arbitrage.
The second track is regulatory. The government must continue targeting illegal money-transfer networks, publish lists of sanctioned operators, and coordinate with authorities in the UAE, Turkey and China to curtail offshore holdings. Gold-sector reforms are equally important: without tighter oversight, the metal will continue to provide a steady stream of hard currency to the black market.
A Responsibility Shared
For the diaspora, remittances are both an economic lifeline and a political act. Choosing regulated channels strengthens the country’s financial position; choosing unregulated ones weakens it. As the embassy source noted, even small rate differences can shift behaviour. Legal operators must therefore be allowed—and required—to offer competitive terms.
Ethiopia’s currency is, at heart, a governance challenge rather than a purely economic one. Floating the Birr may well be necessary, but it is insufficient on its own. The real issue is not the price of dollars—it is the path dollars take, and the fact that too few of them pass through Ethiopia’s banking system.
Until that structural weakness is addressed, the black market will survive any exchange-rate regime. And Ethiopia will continue to lose the foreign currency it can least afford to forfeit.
