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BusinessEthiopia’s forex reserve plummets to USD 1.6 bln

Ethiopia’s forex reserve plummets to USD 1.6 bln

Covers only 1.3 months of imports

Ethiopia’s foreign currency reserve fell to USD 1.6 billion, which only covers the import bill for 1.3 months, as of December 31, 2021, a new report shows.

The reserve dropped by half, compared to the 2.4 months of import bill coverage it had by September 2020, just before the war broke out in northern Ethiopia, according to the central bank’s six months report to the House of Peoples’ Representative (HPR),.

The import bills coverage remained stable at 2.2 months until June 2021 and went down to 1.7 months as of September 2021, according to the report. It is a situation that has forced the central to take stringent measures, including the lowering of forex retention by exporter.

The fall in forex reserve is also the result of the surge in country’s import bills, which led to the widening of the trade deficit, which has widened to USD 3.16 billion during the first quarter of 2021/22 fiscal year, down from the 2.64 billion registered during last year’s same period.

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The reserve was sound throughout 2020/21, before it plunged since the beginning of 2021/22 fiscal year, which resulted in the inability of commercial banks to approve Letter of Credit for imports. The CBE, which managed to generate USD 1.3 billion over the past six months, did not approve LCs since July 2021, when it approved close to USD one billion at once.

“We did not approve significant LCs. We have no plans in the nearby future and we will approve LCs when we have sufficient forex at hand,” said Muluneh Aboyeh, vice president for credit compliance at the CBE.

Fikadu Digafe, vice governor and chief economist at the NBE, argued the numbers do not matter.

“It is how we are managing the forex deficit that matters. We are taking various majors to handle the forex shortage, ranging from increasing forex surrendering to the NBE to re-prioritizing imports,” said Fikadu.

The central bank increased surrendering of forex by exporters and remittance, from 40 to 70 percent earlier this year.

The bank also introduced a new list of import items, prioritizing only basic items but the surge of commodity prices in the international market is affecting the country’s forex reserve.

The import bill of fertilizers doubled to USD 1.2 billion for the current fiscal year, while fuel, wheat, sugar, edible oil and others have substantially increased over the past six months.

The central bank also embarked on setting the floor price for export commodities, in a bid to avoid under-invoicing and maximizing export revenues.

The price of khat export is set at USD 10 per kilo, up from USD five, since the past two months. Similarly, a new floor price was set for livestock and meat exports.

“Remittance is also not bad. The only solution is to become self-sufficient in terms of generating our own forex, since external sources are dropping,” added Fikadu.

In the first quarter of 2021/22, the overall balance of payments registered USD 972.3 million in deficit, almost five times higher than the figure registered during last year’s same period.

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