Potential Drivers of Post-Reform Parallel Market Premium: Federal Democratic Republic of Ethiopia

A comparative analysis of Ethiopia with Angola, Egypt, and Nigeria highlights three structural factors that may be sustaining the parallel market premium despite exchange rate unification: (i) some remaining current account restrictions, including a 2.5 percent commission payable to National Bank of Ethiopia (NBE) on foreign exchange (FX) sales; (ii) a tightly closed capital and financial account coupled with low returns on Birr denominated assets; and (iii) an underdeveloped financial market, lacking hedging instruments and dominated by a single bank, which weakens competition and reduces market efficiency. While each case has its own distinctive features, Ethiopia’s conditions most closely resemble those of Angola during its transition to a more flexible exchange rate regime, where a significant parallel market premium persisted.