The Diaspora's Shadow Currency: Remittances, Hawala, and the Parallel Economy

The currency the state did not issue

When the Ethiopian government’s official exchange rate stopped bearing any honest relationship to economic reality — which it did, with varying severity, across the entire post-1974 period — the Ethiopian population did not stop transacting in foreign currency. It transacted more in foreign currency, through channels the state did not control. By the 2020s, alongside the formal birr economy was a parallel monetary system that operated principally in US dollars, was settled through Somali- and Eritrean-diaspora hawala networks, was capitalised by remittance flows from approximately 2.5 million Ethiopians abroad, and handled volumes that — by some estimates — exceeded the formal NBE channels in particular categories of cross-border activity.¹

This article argues that the parallel system is not, as Ethiopian officialdom has consistently framed it, a criminal aberration to be suppressed by enforcement. It is the natural — even predictable — economic response of a population whose state currency had become unfit for purpose. The participants are not, principally, criminals. They are diaspora households trying to maximise the support delivered to their families, traders trying to keep businesses operating, hawala intermediaries providing a service the formal banking system was unable to provide. The parallel system performed real economic functions that the official system could not. Understanding it is not optional for understanding Ethiopian monetary history; the parallel economy is the monetary history for substantial parts of the population.

The series’s argument extends to a normative claim: the right policy response to the parallel system has never been enforcement; it has always been the policy reform that would make the parallel system unnecessary. The 2024 float was the first serious move in that direction. Whether it is sustained is the open question of articles 21 and 22.

The numbers

The scale of the Ethiopian diaspora and its remittance flows is worth establishing precisely, because the discussion sometimes treats diaspora remittances as a marginal supplement to formal foreign-currency inflows rather than as the substantial economic force they actually are.

The Ethiopian diaspora is estimated at approximately 2.5 to 3 million people worldwide, with the largest concentrations in the United States (perhaps 1 million, with major communities in the Washington DC area, Minneapolis, Seattle, and Las Vegas), in the Middle East (Saudi Arabia, the UAE, Lebanon, and elsewhere, often as domestic and construction workers), and in Europe.² At approximately 2.5 percent of the home-country population, the Ethiopian diaspora is significant but smaller in proportional terms than the diasporas of comparator countries (the Philippines, around 10 percent; El Salvador, around 20 percent).

What the Ethiopian diaspora delivers in remittance terms has been growing rapidly. Formal remittance inflows to Ethiopia, as measured by the NBE and reported to the World Bank, were approximately $300 million per year in the early 2000s, rose to around $4–5 billion per year by 2015–17, and have continued at similar levels since.³ But the informal flows — through hawala and other parallel channels — are estimated to have been at least as large as the formal flows in most years, and probably substantially larger in years when the parallel premium was high.

The IMF, in its 2022 country assessment, estimated that total remittance flows (formal plus informal) to Ethiopia were probably $7 to $10 billion annually — roughly comparable to the country’s total goods export earnings in the same period.⁴ This is, in foreign-exchange terms, an enormous flow. For comparison, the IMF’s $3.4 billion ECF arrangement of 2024 was, in headline terms, less than half of one year’s total remittance inflows.

In the post-float period, the formal-channel share has risen sharply. The NBE’s reporting indicates that formal remittance inflows in the first half of fiscal year 2025/26 reached $4.6 billion, a 36.5 percent year-on-year increase, attributed to the shift of inflows from informal to formal channels following the float.⁵ This is consistent with the framing of this article: when the formal exchange rate approaches the informal rate, diaspora senders shift their flows to formal channels, because the rate differential disappears.

How hawala worked

The mechanism by which diaspora remittances reached Ethiopia through informal channels is worth describing because it shows the parallel system as an economic institution rather than a criminal one.

A worker in Saudi Arabia or Lebanon, paid in Saudi riyals or Lebanese pounds, would visit a Somali- or Eritrean-owned remittance office in the city where he worked. He would deposit the foreign currency with the office, specifying the recipient (typically a family member) and the destination (typically a specific town in Ethiopia, or Addis Ababa). The remittance office would, instead of executing a SWIFT transfer through the formal banking system, communicate the transfer instruction by phone or messaging to an affiliated office in Ethiopia — typically also Somali- or Eritrean-owned, often in the Bole or Mercato districts of Addis Ababa, or in border towns like Moyale or Jijiga.

The Ethiopian-side office would then, the same day in most cases, pay out birr to the recipient at the parallel exchange rate — which was, often, substantially better than the official rate. The settlement between the two offices happened separately: typically through informal book-keeping, periodic gold or commodity shipments across borders, or counter-flows of remittances in the opposite direction. The system worked because the volume of remittances in both directions, and the trust between operators in the diaspora networks, made the bookkeeping settlements manageable without each individual transaction having to be matched.

The cost to the diaspora sender, in fees, was typically lower than the formal banking system’s effective cost when waiting times and the parallel-rate differential were accounted for. The cost to the recipient, in birr received, was typically higher than what the formal system would have delivered. The cost to the Ethiopian state, in foreign-exchange inflows captured by formal channels, was substantial — the dollars or riyals that went into the hawala system never reached the NBE’s reserves.

This is what the 2023 Reporter article — its title “Banks Complicit As ‘rubber Stamps’ For Illegal Hawala 105 Birr Rate” — documented in detail.⁶ Hawala firms in 2022–23 were paying 105 birr per US dollar to remittance senders while the official rate was approximately 53. The gap of nearly 100 percent was the implicit subsidy from the diaspora to the parallel system, and from the parallel system to the recipient households who were getting nearly twice as many birr per dollar than the formal channels would have delivered. The diaspora was not, in this transaction, defrauding the state. The diaspora was getting paid for what the state had implicitly priced.

Who benefited

The parallel remittance system had three distinguishable beneficiary classes, each worth understanding.

The first was Ethiopian families receiving remittances. They got more birr per dollar, faster, with less paperwork. For households dependent on remittance income — which, in many parts of rural Ethiopia and in significant parts of Addis, included most middle-income families with a relative abroad — the parallel system was the difference between meaningful support and inadequate support. The system was not a luxury for these households; it was the operating reality of their economic lives.

The second was hawala intermediaries. They earned margins on the difference between what they paid the diaspora sender and what they collected from settling cross-border. The margins were not enormous on a per-transaction basis, but the volumes were large, and the cumulative profitability of the major operators was substantial. Some operators have, over time, accumulated substantial assets. Some have also been credibly accused of using hawala channels for purposes other than remittances — money laundering, sanctions evasion, financing of unauthorised political activity. The accusations are real, and the NBE’s August 2025 announcement of investigations into four Somali-owned US-based remittance firms reflects a legitimate concern about the use of these channels for illicit purposes.⁷

The third — and least discussed — was the Ethiopian state itself, indirectly. The parallel remittance system, by keeping dollars circulating in the Ethiopian economy outside the formal channels, supported import activity that the formal forex-rationing system could not have funded. Imports of consumer goods, of intermediate inputs for small and medium businesses, of medicines, of construction materials — much of this was financed through the parallel system rather than through the formal system. Without the parallel system, import compression in the GTP era would have been substantially worse, and the political consequences (in the form of consumer-goods shortages, manufacturing-sector collapse, and visible economic decline) would have been worse with it. The Ethiopian state, in its rhetoric, denounced the parallel system. In practice, it benefited from the fact that the parallel system was filling gaps the formal system could not fill.

The de facto dollarisation of the elite

A separate but related feature of the parallel monetary system is what economists call de facto dollarisation: the use of foreign currency as the unit of account, the medium of exchange, or the store of value within a country, even when the country has its own currency that is the legal tender.

By the 2010s and 2020s, substantial parts of the Ethiopian elite economy were operating in dollars. Real-estate transactions in the high-end Addis market — Bole, Old Airport, Kazanchis, Sarbet — were routinely priced and settled in dollars rather than birr.⁸ High-end services (international schools, private medical care, some hotel and restaurant pricing) were dollar-denominated. Diaspora-financed businesses kept dollar accounts wherever possible. Wealthy Ethiopians held substantial portions of their savings in dollars, either onshore in foreign-currency accounts or offshore in international banks.

This dollarisation was not the product of any explicit policy choice. It was the response of economic actors to a national currency they did not trust to hold value over the horizons relevant to their transactions. If you were buying a house in Bole for what would be a substantial life-savings expenditure, the question of whether you would be repaid the real value of your investment ten years later was a question about the birr’s real exchange rate over a decade — a question to which the answer, given the historical record, was that no one knew. Pricing in dollars solved the problem by removing the birr from the transaction.

What de facto dollarisation cost the state was substantial. It meant that the NBE’s monetary policy — the management of the birr money supply, the setting of interest rates — operated only on the un-dollarised part of the economy. The dollar-denominated transactions were, in monetary terms, invisible to the NBE. The state’s effective monetary control was substantially less than its formal monetary control. This is one of the costs of running a currency that loses purchasing power: the population, in the parts of the economy where it has alternatives, stops using the currency.

Why “crackdowns” never worked

Every Ethiopian government since the Derg has, at various points, attempted to crack down on the parallel currency market. The Derg’s enforcement was the most severe, including criminal penalties for parallel-market transactions. The EPRDF maintained legal prohibitions throughout its period in office and conducted periodic enforcement campaigns. The post-2018 government, despite Abiy Ahmed’s reform rhetoric, continued enforcement actions through 2023 — including suspensions of forex-related services in border towns and arrests of hawala operators.⁹

None of these campaigns succeeded in eliminating the parallel market, for the reason article 8 already named: the parallel market existed because of the gap between official and unofficial rates, not because of the criminal motivations of its participants. As long as the gap existed, the economic incentive for parallel transactions existed, and new participants would replace any operators who were arrested or whose offices were closed. The enforcement campaigns generated headlines, occasional convictions, and continuous churn in the operator pool, but the underlying volumes never meaningfully fell.

The only thing that did, in fact, reduce the parallel-market activity was the 2024 float. By closing the gap between official and parallel rates, the float removed the economic motivation for parallel-market transactions. The 36.5 percent surge in formal remittance inflows reported by the NBE in the first half of FY 2025/26 reflects, in significant part, the migration of diaspora flows from parallel to formal channels — not because enforcement was working better than before, but because the rate differential had largely closed.

The post-float fragility

The post-float adjustment is not complete, however. The NBE’s continued enforcement actions through 2025–26 against unlicensed remittance operators suggest that some hawala activity has continued, that the post-float rate differential — though much smaller — is still large enough to support some parallel activity, and that the political economy of suppression has not been fully replaced by the economic logic of full normalisation.¹⁰ The April 2026 NBE directive consolidating remittance regulation, and the publication of an updated list of approved providers, are normal regulatory responses. They will, the series predicts, succeed only to the extent that the underlying rate differential remains narrow.

The new external shock that could test this is the US 1 percent remittance levy introduced in 2026 as part of the Trump administration’s broader tax policy.¹¹ The levy, however small in absolute terms, raises the cost of formal remittance channels and could push some flows back to parallel routes if the formal-parallel differential were to widen for any reason. The Institute for Financial Affairs analysis of February 2026 flagged this risk explicitly.¹²

The deeper point for the series is that the parallel economy was, and to a residual extent still is, a structural feature of Ethiopia’s monetary order. It existed for sound economic reasons given the policy environment. It would disappear only when the policy environment removed the reasons. The 2024 float was the necessary first move. Whether it is sufficient depends on whether the post-float exchange-rate regime is allowed to clear continuously — which depends, in turn, on the political economy questions article 25 will examine.

The next article turns to the asset side of the bargain the GTP-era developmental state struck: the Chinese-financed infrastructure binge of 2010–2018, and the road from that binge to the 2023 Eurobond default.

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Footnotes

1. Migration Policy Institute, “Government Efforts to Boost Diaspora Remittances Earn Mixed Results,” November 2025, citing 2.5 percent of population estimate for Ethiopian diaspora. UNCDF, “Ethiopia Country Assessment Report on Inclusive Digital Economies,” October 2022. ↩

2. International Organization for Migration, Migration in Ethiopia: A Country Profile (IOM, 2018). ↩

3. World Bank, “Personal remittances, received (current US$) — Ethiopia,” World Development Indicators. ↩

4. International Monetary Fund, “Ethiopia: 2021 Article IV Consultation,” IMF Country Report 22/108 (April 2022), discussion of formal vs informal remittance flows. ↩

5. “NBE Again Flags Legal Risks in Hawala-Style Remittances,” Birr Metrics, April 2026, citing the NBE-reported 36.5 percent year-on-year increase in formal remittance inflows to $4.6 billion in H1 FY 2025/26. ↩

6. “Banks Complicit As ‘rubber Stamps’ For Illegal Hawala 105 Birr Rate,” The Reporter Ethiopia, May 2023. ↩

7. “Ethiopia targets Somali-owned remittance firms in U.S. over money laundering claims,” Hiiraan Online, August 2025. ↩

8. “The National Bank Of Ethiopia’s Directive And Its Implications For Pricing And Unofficial Markets,” The Reporter Ethiopia, February 2026, including documentation of high-end Bole apartment pricing in dollar-equivalent terms. ↩

9. Tewodros Aragie Kebede, “Should Ethiopia legalise its informal currency exchange markets?”, ENACT Africa. ↩

10. “NBE Again Flags Legal Risks in Hawala-Style Remittances,” Birr Metrics, April 2026. ↩

11. Institute for Financial Affairs, “Remittances Under Pressure: Why a U.S. Policy Shift Matters for Ethiopia’s Macro Stability,” February 2026, https://www.ifa.gov.et/2026/02/04/remittances-under-pressure-why-a-u-s-policy-shift-matters-for-ethiopias-macro-stability/. ↩

12. IFA, “Remittances Under Pressure.” ↩