exchange rate was birr 28 per dollar while the parallel market exchange rate was approximately birr 36 per dollar with spikes up to birr 40. Delays encountered by businesses in obtaining foreign exchange for imports, which were in the range of 6 to 8 months, have intensified in 2017/18 to reach more than a year. According to the NBE, between mid‐May 2018 and January 2019, banks have received foreign exchange requests worth of US$7.4 billion but were only able to meet 31 percent of this demand. As a result, the queue for foreign exchange increased by US$5.1 billion in less than eight months.

The foreign exchange shortage distorts the economy in several ways. Exporters and other operators who have priority access to foreign exchange have incentives to sell their allocations to importers at inflated rates, creating a black‐market for dollars, which premium has hovered around 30 percent over the official rate in recent months. Other exporters use their foreign exchange earnings to import consumer goods with high margins rather than re‐investing profits in their core business. Slow‐downs in manufacturing due to foreign exchange shortages are reportedly common, and high‐profile local businesses have closed their doors altogether due to the inability to import required goods in a timely fashion.<sup>75</sup> Although government policy prioritizes the repatriation of profits in access to foreign exchange, in practice, companies have also experienced delays of up to two years in the repatriation of larger volumes. Partnering with export‐oriented companies is a strategy employed by the private sector to address the foreign exchange shortage, but access to foreign exchange remains a problem that can limit growth, interfere with maintenance and spare parts replacement, and inhibit imports of adequate raw materials. The shortage of foreign exchange tends also to fuel the contraband trade through Somaliland because the birr is an unofficial currency there and can more easily be used to purchase products from around the world.

# 3.5. Underdeveloped and fragile financial system

Ethiopia has one of the least developed financial systems in the world. In the 2018 Global Competitiveness Report, Ethiopia ranked 126 of 140 countries in terms of financial system development.<sup>76</sup> With total assets of 46 percent of GDP, Ethiopia’s financial system is shallow and does not serve well the needs of a transforming economy. Access to finance is identified as the main obstacle to business by 40 percent of firms.<sup>77</sup> While the share of adults having a bank account has increased significantly in recent years, it remains at a low 35 percent in 2017 (as compared to 43 percent on average in Sub‐Saharan Africa). The number of bank branches per capita is low and branches are concentrated in major towns and cities.<sup>78</sup> Nearly one‐third of branches are located in Addis Ababa. The rural poor have little access to formal banking instruments and rely on microfinance institutions (MFIs), informal financing like saving and credit associations, moneylenders and friends. In the absence of formal banking, MFIs have developed and operate a network of around 1,900 branches in September 2018. Some of the biggest MFIs outperform most of the banks in the country in terms of branch network and capital.<sup>79</sup>

> 75 U.S. Department of State, Bureau of Economic and Business Affairs, Investment Climate Statements for 2018.

> 76 World Economic Forum (2018). Global Competitiveness Report 2018.

> 77 World Bank Enterprise Survey (2015).

> 78 Gashayie, A. and M. Singh (2016). “Development of Financial Sector in Ethiopia: Literature Review”, Journal of Economics and Sustainable Development, Vol 7, p 9‐20.

> 79 For instance, with capital of US$151 million and a network of 380 branches as of June 2016, Amhara Credit and Saving Institution (ACSI) is more capitalized and has a wider branch network than most of the private banks in Ethiopia.

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