NBE’s Directive on Fuel Imports Raises Concerns of Increased Activity in Parallel Markets

The National Bank of Ethiopia (NBE) has shifted a significant portion of the foreign currency responsibilities for fuel imports to commercial banks. As part of this new directive, private banks are now responsible for covering 50% of the annual fuel import costs, which amount to $3.2 billion. This translates to securing $1.6 billion for fuel imports. 

Previously, the NBE would hold onto up to 50% of foreign currency income to ensure adequate reserves for importing essential commodities such as fuel and fertilizers. However, due to the new macroeconomic reforms, banks and exporters are now permitted to retain a larger portion of their foreign exchange earnings. 

Due to the high demand for foreign currency from fuel companies, the new requirement is expected to place a significant burden on private banks. In 2023, the Ethiopian Petroleum Supply Enterprise (EPSE) reported the import of approximately 975,347 metric tons of refined petroleum products. The total value of these imports exceeded 64.2 billion Ethiopian birr during.

Wasihun Belay, an economist based in Ethiopia, has been actively advocating for the country’s economic reforms and policies through his social media channels. In his recent post, he labeled the news as “bad news for commercial banks.”

“With the shift of the fuel exchange system to a digital platform through Telebirr, banks are losing significant cash flow from fuel companies, which they previously held as reserve funds,” he argues.

He adds that this new directive may worsen existing issues, as it provides a substantial amount of foreign currency to fuel companies, potentially causing them to lose customers due to currency shortages. This, he cautions, could push investors toward the parallel markets.

Abreham Terecha, a Branch Manager at NIB Bank, acknowledges that this directive has both direct and indirect effects on the country’s economy; however, he does not perceive it as disadvantageous to the banking sector. “The bank’s foreign currency sources, such as remittances and exports, are not yielding the expected amounts. While fuel consumption requires a significant amount of foreign currency, I am doubtful that banks will be able to meet this demand,” he states. He added that even clients are struggling to access the foreign currency they need, which he considers misaligned with the bank’s capabilities. In light of this, he warns that this move should not negatively impact the overall economy, as it is heavily reliant on fuel.

“It will undoubtedly impact importers and traders, which will, in turn, raise the cost of living,” he added.

As for the government, Belay sees an upside. “Although challenging for commercial banks, the government stands to benefit. It will be relieved from the burden, and the foreign currency can serve various purposes, as a monetary tool during economic shocks, for auction bids, for transfers to other sectors, or to purchase goods for infrastructural development.”

By shifting the responsibility to private banks, the government may alleviate the burden of managing fuel import transactions, enabling it to concentrate on other critical priorities. However, it is essential to align the capabilities of the banks with the needs of the fuel sector. Experts suggest that the government closely monitor whether the demands of fuel importers are being met. Additionally, the government should investigate the factors contributing to insufficient remittance flows. Ensuring peace and stability is also crucial for revitalizing productive areas and enabling them to generate foreign currency. Once peace and stability are established, logistical and supply chain challenges can be addressed, ultimately enhancing export productivity.