Ethiopia: Forex Crunch Choking Businesses in the Country January 10, 2016

(Addis Fortune) — Ethiopia’s foreign currency supply available for importers and travellers alike is increasingly facing chronic shortages, claims an importer engaged in trading of household appliances from Asian countries, while opting to speak to Fortune on conditions of anonymity. As the country’s foreign exchange provision plummets into a whirlpool, the parallel or black market for hard foreign currency (which has become a rare commodity), is thriving in the country.

The forex shortage is so critical that opening a Letter of Credit (LC) takes as long as one year or even more, and even then, there is no guarantee that the requested amount of foreign currency will be availed, the importer complained.

His is not the sole voice of concern with the increasing scarcity of foreign currency in Ethiopia, as his view is also shared by a senior executive of a private bank and an economics lecturer, who also chose to speak anonymously to Fortune. They argue that basic economic principles of supply and demand suffice to explain the ongoing critical shortfall of forex in Ethiopia.

Both the banker and economist posited three basic factors: global economic slowdown, Ethiopia’s mega projects consuming huge loads of hard currency and the country’s widening trade balance, as the genesis of the shortage.

As the world still reels from the financial meltdown of 2008 and the subsequent global economic slowdown, it has negatively affected and upset long term foreign investment in the country, the banker and economist argued. However, a recent study by the United Nations Conference on Trade & Development (UNCTAD) discovered that Ethiopia is actually the third largest recipient of Foreign Direct Investment (FDI) in Africa, with inflows of 953 million dollars in 2014 and 279 million dollars in 2013, highlighting a rapidly rising trend.

Ethiopia’s mega projects in hydroelectric generation, sugar production, and rail transport, continue to drain the country’s hard currency reserves, with high demand for public investment, the experts argued. Import of capital goods and construction-related services increased sharply in Ethiopia according to a June 2015 IMF report, utilising large sums of hard currency.

In line with the country’s development endeavours, the National Bank of Ethiopia (NBE) has a policy of prioritising provision of foreign exchange for selected goods and services based on a designated priority, which shuns other imports, the banker explained. The mega projects top the priority list and drain the country’s forex reserves.

In addition to the impact of the country’s mega projects taking a rather large chunk of the highly limited forex reserve, Ethiopia’s trade balance is also one of the major factors affecting the availability of hard currency.

Though Ethiopia’s exports have registered growth over the past years, the growth rate of its imports has been at a much faster pace, resulting in an ever widening gap in the overall trade balance of the country.

Reports by NBE indicate that though the country’s export trade has been registering steady growth in the recent past, with exports worth roughly two billion dollars in 2009/10, increased to 3.25 billion dollars in 2013/14 and more than 1.6 billion dollars in the first two quarters of the current fiscal year, the country’s imports have skyrocketed at an alarming rate.

NBE’s data show that Ethiopia’s imports have maintained a robust course of growth over the years as the country imported goods worth roughly 8.27 billion dollars in 2009/10, increased to 13.72 billion dollars in 2013/14 and well over eight billion dollars in the first two quarters of the current fiscal year.

The national bank’s data also highlight the distressingly widening trade imbalance which continues to haunt Ethiopia’s balance of trade. As such, the trade deficit was put at an estimated -6.27 billion dollars in 2009/10, -10.47 billion dollars in 2013/14 and roughly -6.6 billion dollars for only the first two quarters of 2015.

This imbalance has partly been caused as a result of slow-evolving export growth rates with falling commodity prices and lack of diversification in exports, loopholes underscored by the International Monetary Fund’s (IMF) report.

But beyond the basic economic principles of demand and supply used as tools to explain the shortage of forex, other variables are worth exploring to get the picture of the problem in its entirety.

One important aspect is the proliferation of the black market and shady business deals between businesspeople and bankers. As anxious importers are willing to pay whatever cost they are made to pay to avoid penalties during delivery of imported goods, and as some corrupt bank staff and managers take advantage of the situation, the forex shortage has worsened.

Fortune spoke to a dealer, who, on conditions of anonymity, explained some of the processes in which brokers, importers, exporters and bankers engage, to facilitate the provision of forex at a faster time interval than normal. He stated that the deals take place underground but strictly follow legal procedural steps. This makes the whole process virtually undetectable by regulations of the national bank.

At the current going rate, a person who wants to get forex ahead of the pack, has to pay as much as three Birr for every dollar they request in their LC, the dealer told Fortune. His job is to bring together the bankers and the importers and the deal will be done. He also explained a different, still illegal, mode of acquiring forex employed in the context of secret partnerships between corrupt importers, exporters and bankers.

In this case, the dealer negotiates a proposal between an exporter and an importer where the latter will make use of the export earnings of the former, by paying the current going rate for every dollar used. The dealer once again negotiates the proposed scheme with the bankers and once on board, they jointly facilitate the importers’ access to hard currency.

The lack of transparency in opening LCs has cast an ominous shadow on the industry, according to several importers and the banker who spoke with Fortune. NBE recently took a highly publicised measure against the Cooperative Bank of Oromia for alleged mishandling of forex involving LCs.

One importer noted that a growing number of suppliers in Asia are now rejecting LCs opened in certain banks from Ethiopia, due to unpaid credits, emboldening his opinion that unless the regulatory state apparatus takes a serious overhaul at the forex provision, darker days are yet to come.

Travellers are also feeling the brunt of the forex crunch. As one traveller put it, she considers herself lucky if she can get 500 dollars from banks for a travel visa. The chronic shortage, she adds, has fed the parallel market for forex and its proportions and ramifications on the country’s economy are growing daily.

The CIA’s Factbook showed Ethiopia’s reserve of foreign exchange and gold was 3.785 billion dollars at the end of 2014. International financial institutions such as IMF have stated that they support the national bank’s objective of having foreign exchange reserves to cover three months of imports – but the central bank has so far, failed to respond to any of the questions Fortune had regarding the overall forex shortage in the country, including the state of forex reserves.

In addition to racking up the reserves, NBE should proactively counter all the shady business deals now widespread in the banking sector to cut the business community and the overall economy of the country, some slack.

Related:-

Ethiopia: The chronic shortage economy: What is the price and utility of a kilo of Sugar in Finfinnee (Addis Ababa) in terms of never ending queue?

https://oromianeconomist.wordpress.com/2015/08/27/ethiopia-the-chronic-shortage-economy-what-is-the-price-and-utility-of-a-kilo-of-sugar-in-finfinnee-addis-ababa-in-terms-of-never-ending-queue/