Pressure is mounting on private banks writing letter of credit (L/C) business in Ethiopia as the country continues to suffer, in general, a lack of foreign exchange.

But the National Bank of Ethiopia (NBE) has now advanced at least one billion US dollars in foreign currency to state-owned Commercial Bank of Ethiopia (CBE), causing depositors to pull their savings out of the country's private banks.

L/Cs released

The foreign currency injection from Ethiopia's central bank means CBE has been able to start releasing L/Cs that have been delayed for the past 10 months.

Companies in the manufacturing sector are the main beneficiaries, but private banks are suffering a liquidity crunch.

Negative impacts

Depositors are pulling cash out of private banks and depositing it in NBE accounts. A senior executive at Debub Global Bank told local media that NBE's and CBE's foreign exchange and L/C strategy has precipitated a decline in deposits.

Making it even tougher for private banks to write L/C business, applicants for foreign exchange are now required to pay 100 per cent cash in advance to open L/Cs, triple the previously standard 20-30 per cent margin.

Longstanding problems

Over a year ago, it emerged that Ethiopia's shortage of foreign exchange had become so critical that opening an L/C could take up to one year, or in some cases longer (DC World News, 12 February 2016).

Earlier this year Ethiopian business leaders renewed criticism of their government for failing to address the longstanding issue of L/C shortages (DC World News, 12 February 2016).

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.