четверг, 10 мая 2018 г.

Forex market in ethiopia


Ethiopian Birr.
The official currency of Ethiopia is the Ethiopian Birr (ETB). The Ethiopian Birr is subdivided into santim; 100 santim = 1 ETB. Br is the symbol used for the Birr. The Nigerian Naira is rated the most-used currency in Africa, the Birr is rated second.
Ethiopia’s economy is mainly based on the agricultural industry, which forms 80% of the yearly GDP. There are no private businesses and no patent laws apply in Ethiopia. Unemployment rate among youth is estimated at 70%. The main industries are metals, cement, textiles, food processing, and cement. Export products are leather, oilseeds, coffee, flowers, gold, qat, and live animals. Import products are motor vehicles, textiles, cereals, petroleum, food, and chemicals.
During the 18th and 19th centuries the currency for Ethopia was the Maria Theresa Taler, also known as the Birr, which means silver. The Taler became the official coin in 1855, but the Indian Rupee and the Mexican Dollar were used for foreign trading. In 1893, the Birr was introduced as the standard unit. It was subdivided into 20 girsch. A new range of Ethiopian coins appeared in 1903. The Bank of Ethiopia was formed in 1931. At that time the Birr became equal to the mentonnyas. 1 Birr = 100 metonnyas. During the mid 1930s the currencies circulated were the Birr and the Talari. From 1936 to 1941 Italy occupied Ethopia and the Italian Lira was used. In 1945, the second Birr was introduced; 2 schillings = 1 birr. In 1976, the Birr was made the official currency.
Symbols and Names.
Bills: 1, 5, 10, 50, 100 birr Coins: 1, 5, 10, 25, 50 santim. 1 Birr.
Countries Using This Currency.
Currencies Pegged To ETB :
ETB Is Pegged To:
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Rise in parallel forex market raises concern in Ethiopia.
“I don’t know who they are and they don’t know who I am,” says an illegal hard currency dealer, explaining his relationship to his customers. “We just exchange the currency. People come and go, just like that.”
For the past few months the gap in the exchange market between formal channels and the parallel market has been widening. People familiar with the issue argue that there is a massive demand on the parallel market for the buying and selling of hard currency.
On the parallel market, dollars are exchanged with a four birr difference from that of the bank rates.
The never-ending dilemma of a shortage of foreign currency is always haunting this nation. Former Finance Minister, Sufian Ahmed once commented that he did not expect to see the forex reserve shortage resolved during his tenure.
Although there is no real agreement about the cause of the increase in the rate gap, there is a consensus that the demand for the parallel market must have increased while supply was limited.
The supply side of the parallel market is assumed to be connected with currency from remittances, as opposed to formal channels. Moreover, the number of tourists flowing into the country has decreased because of the unrest in parts of the country and the declaration of a state of emergency.
Following the unrest, a number of European countries issued travel advisories restricting their citizens from going to violence-prone areas. This has had an impact on banks, where hard currency from tourists is traded and exchanged, according to a manager at a private bank.
Hotel owners in Addis Abeba have appealed for a lift of the travel advisories issued by foreign governments, and requested help and support from the government for their sector. This week, the hotels association submitted a letter to the Prime Minister’s office regarding the losses they have been incurring throughout the year.
Due to the drop in visitors, some of the hotels (that are also a source of hard currency) are unable to pay their loans, according to representatives of the Addis Abeba Hotel Owners Trade Sectoral Association. During the first quarter of the current fiscal year, Ethiopia reportedly collected 872 million dollars, which is seven million dollars less in comparison to last year’s.
And although it is just speculation, financial industry insiders claim there might be capital flight outside the country, especially with regards to the recent instability.
“Some people, especially foreign investors may be trying to send their money outside the country,” said a senior international manager at a private bank, who asked to remain anonymous. “Although the tourist inflow has also affected the supply to the parallel market.”
The trend of under-invoicing import items may also contribute. Under-invoicing is the practice of declaring a lower than actual price on an invoice for import items. The difference is then paid to the seller in cash. The only way to fill the margin is by accessing hard currency from the black market, according to the manager.
Specifically, it is done using Togo-Challe; the illegal exchange of cash along the Ethio-Somali boarders.
This transaction is specifically done when hard currencies are transferred into the country via the formal channels. The currency is then transferred to banks in nearby countries where it can be withdrawn in different currencies. The hard currency will then be carried into the country and traded in the black market.
Importer/exporters go to forex dealers, buy hard currency and use it to import and export different commodities. The importer/exporters receive money from outside the country as advance payment for their goods, and declare the money to bring it into the country.
“This is usually done to inject the currency into banks. It is another form of money laundering,” says the IBD manager.
The issue of Togo-Challe was once raised by senior bank officials in a meeting chaired by one of the vice governors of the Central Bank in August 2016. The response from the Bank was that the issue was under investigation.
Other bankers argue that the reason for the increase in demand in the parallel market is the changes to banking policies that mandate a first-come first-served forex policy. Exporters who used to be given priority at banks to receive hard currency are flooding to the parallel market.
“People are also speculating about the devaluation of the birr, especially after the suggestion by the World Bank,” said an importer and investor involved in commercial farming. People want to keep hard currency on hand.
On December 6, 2016,World Bank released its fifth Ethiopian economic update. One of the pertinent issues raised at the meeting was the World Bank’s suggestion of devaluing currency. Government officials, including the Vice Governor for Monitoring Stability, Yohannes Ayalew, decried the idea of devaluing the birr. His argument is that devaluing the currency has more of an unpleasant impact than a positive one.
Alemayehu Geda, a professor of economics at Addis Ababa University, conducted a study in 2010 about the devaluation of currency.
“What I found out was that devaluing the currency resulted in inflation,” he told Fortune.
The last time the government devalued the currency was six years ago. The 20pc devaluation caused a 40pc increase in inflation, according to Alemayehu.
“Devaluation is not a solution,” he argues. “Emerging issues such as the unrest might be affecting the foreign currency situation we are seeing.”
“The public’s perception of the government affects the currency market. It’s not right,” according to the professor. “Everything has to be market driven.”
On the other hand, some economists argue in favour of devaluation.
Although officials openly criticize the idea of devaluing, the real effective exchange rate (REER) has appreciated in cumulative terms by 84pc since the nominal devaluation in October 2010.
However, the speed of appreciation slowed down over the past six months; the appreciation between July and August 2015 was 24pc. The appreciation slowed to eight per cent in June 2016. This was primarily caused by two factors: first, a relative decline in the rate of domestic inflation, and second, the depreciation of the U. S. dollar relative to other currencies since January 2016.
With the banks feeling the crunch, the allocation of foreign currency is more important than ever.
“It’s just like small drops that we give to those who need it most,” said a Vice President at a private bank. “There are even some banks that have stopped giving hard currencies for travellers.”
In the last fourth quarter of 2015/16, forex bureaus in commercial banks purchased 78.9 million dollars and sold 54.3 million dollars foreign exchange.
One dollar is traded at 26 Br to 27 Br in the black market. At banks, the rate is four to five birr lower.
Another importer who spoke to Fortune on the condition of anonymity would like to see foreign currency exchanges opened to the private sector.
“Like many countries do these days, Ethiopia can also allow the private business owners to trade in foreign exchange,” says the importer. “I believe this will at least ease the shortage.”
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Forex market in ethiopia


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PHOTO: Forex Crunch Worsens.
Forex Crunch Choking Businesses in Ethiopia.
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.

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