Ethiopia flags FX volatility, inflation as top financial risks despite reforms

Exchange rate volatility remains the most immediate threat to Ethiopia’s financial stability despite sweeping foreign exchange reforms, according to a new survey by the National Bank of Ethiopia.

The survey, based on responses from 42 participants including bank executives, academics and advisory firms, shows that foreign exchange risks top the list of concerns, cited by 26.2 percent of respondents. Inflation follows closely at 23.8 percent, underscoring persistent worries over price pressures and currency depreciation.

The findings raise fresh questions about the short-term impact of recent policy shifts, with 26.2 percent of respondents identifying the rapid and continued depreciation of the birr as the single biggest risk facing the financial system over the next one to two years.

They also point to a growing disconnect between reform efforts and market perceptions of stability.

Despite the introduction of a market-based exchange rate regime since 2024, alongside foreign exchange auctions and the liberalisation of currency bureaus, stakeholders continue to view currency movements as a source of instability rather than confidence.

Inflation, the second most cited risk, reflects sustained pressure on prices driven by both domestic demand and global factors, reinforcing concerns about weakening purchasing power and balance sheet vulnerabilities. In February, inflation in Africa’s second most populous nation, ticked down to 9.7 percent from 9.8 percent in the prior month, according to the country’s statistical service.

While macroeconomic indicators show signs of improvement, the NBE survey suggests that underlying risks remain pronounced, particularly in areas linked to exchange rate pass-through and inflation dynamics.

Geopolitical risks and external debt pressures were also flagged as key concerns, with respondents warning that global instability and tighter access to external financing could further exacerbate inflation and strain the financial system.

Credit and liquidity risks were identified as closely interconnected, with stakeholders noting that stress in one area could quickly spill over into the other, amplifying systemic vulnerabilities.

Technology-related risks, including cyber-attacks and digital fraud, were ranked as the least immediate concern. However, the report cautioned that this may reflect limited awareness rather than low exposure, as the rapid expansion of digital financial services is expected to heighten operational risks over time.

Overall, the findings point to a financial system that is stabilising at the macro level but facing persistent uncertainty in key transmission channels, particularly exchange rates and inflation.

Stakeholders called for stronger coordination between fiscal and monetary policy, enhanced regulatory oversight, and deeper foreign exchange buffers to mitigate emerging risks. They also urged increased investment in digital infrastructure and more proactive risk management frameworks, warning that the pace of technological adoption may be outstripping preparedness.