Ethiopian economy is dependent on high importation from foreign countries. The export sector is predominantly agricultural products whose proceed can’t finance the importation of the country. This is the natural cause for foreign currency scarcity in the country. The foreign exchange shortage which the government reacts to it through strict foreign exchange control in turn creates the parallel market for foreign exchange as an alternative means of foreign exchange market. The Ethiopian government has enacted different regulation as to who can get the foreign currency, in what conditions and the maximum amount allowed. Moreover, the first come first served procedure with priority lists excluded many demand from accessing foreign currency in the formal channel. Most Importers, traders, medical payments, travelers’ costs, education fee and other invisible payments is being financed by the parallel market. However the parallel market is excluded from Ethiopia’s foreign exchange regulation. As a result the country’s foreign currency is being managed by individuals who are not accorded legal recognition. Excluding the parallel market from Ethiopia’s foreign exchange regulation affects the country’s economy. There is no transparent capital flow in the country which results in distorted economic and monetary policy. The government cannot allocate foreign currency according to its policy. Formal channel’s foreign currency is dried as the supply of foreign currency is diverted to the parallel market. Unregulated parallel market also create suitable environment for illicit activities like money laundering and capital flight. The paper assesses the treatment of the market in Ethiopia’s foreign exchange regime and all the policy measures taken by the government to combat the problem. In doing so, this research is a blend of both doctrinal and empirical (socio-legal) research that has carried out through qualitative methodology. Criminalizing the act with harsh penalty, Export incentives, devaluation, monitoring under invoicing and other measures have been taken as a response to the problem. But all those measures by the government remain ineffective to address the problem. The major finding of the research is that excluding the parallel market from Ethiopia’s foreign exchange regulation is detrimental to the economy. The government should absorb the parallel market in to the formal market by enforcing the foreign exchange regulation which authorizes NBE to license dealers. In doing so, the government can avoid the problems arising from unregulated parallel market.