Poor Infrastructure Overshadows Remittance Boom

Hana Mesfin, 27, works as a secretary for a private company, earning a monthly salary of 900Br.This, for her, is nothing more than pocket money.

Fortune met Hana on Monday September 2, 2013, at the Commercial Bank of Ethiopia (CBE) branch around Senga Tera, onRas Abebe Aregay Street. She went there to receive 200 dollars sent from her cousin for the coming Ethiopian New Year.

She lives with her five-year-old son, her mother and two of her cousins. Every month, most of her salary goes on covering food expenses, which forces her to rely on her cousin.

‘‘Thanks to my cousin, who lives in theUS, I don’t have to worry about whether my salary will cover my bills and expenses,” Hana told Fortune, while waiting for her turn at the Bank.

Unfortunately, at this time the money had not been delivered and she couldn’t make the receipt because of a network failure at the Bank.

This is one of the problems encountered by the remittance industry inEthiopia, which is perhaps expected to be larger than the export earnings of the country in its foreign exchange generation capacity.

Despite the difference between the official remittances data compiled by the government and different international organisations, like the World Bank (WB), remittance flows represent a significant share of the national income.

Although a lot of the remittances sent toEthiopiaflow through back channels, according to the WB, remittance has averaged 1.3pc of the gross domestic product (GDP) over the last 30 years. Between 1977 and 2003, remittance flows have steadily grown from four million dollars to 47 million dollars a year. After this, the growth climbed sharply towards 172 million dollars and 300 million dollars, in the years 2007 and 2010, respectively.

Various researches note that despite its large migrant population,Ethiopiahas not fully tapped its potential. The current flow of remittance toEthiopiais only one-sixth of its potential.

When reviewing the last three years performance of export earnings and remittance inflows – the major contributors for the national foreign exchange reserve – foreign exchange earned from remittances is growing in leaps and bounds, catching up with export earnings.

Export earnings, which recorded 2.7 billion dollars in the 2010/11 fiscal year, increased to 3.1 billion dollars in the 2011/12, a 15pc increment. The 3.08 billion dollars registered in 2012/13 fiscal year was 77pc of the planned four billion dollars.

On the contrary, remittance exhibited an 80pc increment, from 1.5 million dollars in 2010/11 to close to 2.7 billion in the 2012/13 fiscal year.

However, considering the estimated one million Ethiopian migrants, the achievement is far from the potential the sector holds. According to the WB, close to two billion dollars is estimated to be transferred using informal channels.

Hana’s cousin prefers to send money using formal channels because he sent relatively large amounts, which needs a trustworthy body, according to Hana.

“Previously I receive the money through people who are coming from theUSand we will make the exchange on the black market, because it is a large amount,” Hana said.

One of the reasons for this fast increase, is the narrowing of the spread between official and parallel market exchange rate, a research entitled – ‘’Remittance and Remittance Service Providers inEthiopia’’ – published by theInstituteofAfrican Economic Studies, in 2011 revealed.

The size of foreign exchange in the formal sector is missing calls for immediate policy interventions, which facilities operators to channel them to the formal sector, states the research.

Wondesen Chernet, 29, who was in one of the branches of a private bank to receive the money sent by his sister inKuwait, also told Fortune that he switched to using formal channels a year ago because of security reasons.

The black market is often cited as a reason for being an obstacle for the country in fully utilising its estimated four billion dollar remittance capacity.

In fact, when one looks at the incentive package for the export sector, according to the research, such a policy focus by the government is long overdue.

The Ethiopian remittance services sector is characterised by the co-existence of government and private operators, as well as a significant informal sector. Unlike other African countries, such asKenyaorGhana, the number of formal remittance service providers is extremely limited inEthiopia. There is also lack of information about the number of informal operators.

“Ethiopian citizens, especially those from theMiddle East, do not use a legal means of transferring money,” Ephrem Mekuria, communications manager for the CBE, told Fortune. “Rather, they prefer the informal channels and this is causing problems, both for the country’s economy and for themselves, because the money doesn’t reach the recipient at the desired time and place.”

To rectify the situation, the CBE is conducting a study that enables it to establish   branches, outlets, agents and other facilities, in countries that are identified as a potential source of remittance. As of four years ago, the functioning of the CBE’s subsidiary bank in South Sudan, with two branches inJuba, are a showcase for this effort, according to Ephrem.

Zelalem Ayele, a branch manager at one of Buna International Bank’s branches, located onSierra Leone Streetaround Beklo Bet, says he has witnessed that the number of remittance service providers and remittance receiving customers are on the rise.

The amount of money sent from abroad increases when the holiday is approaching. Moreover, high remittance flow depends on branch location, according to Zelalem, who has worked in the banking sector for more than eight years.

“For example, the Bole Michael area is famous for its Somali immigrants, who are mainly dependent on remittance for living,’’ says Zelalem. ‘‘ Thus, banks around this area are benefiting highly from money flow sent from abroad.”

Adika International Money Transfer, which was established four years ago with an initial capital of 60,000 dollars, is among the few remittance providers in the country. Its agent, Alamin Mohammed, agrees with Zelalem and Ephrem’s opinion about the increasing volume of remittance.

“The increment of our capital, which stands currently at 370,000 dollars, and the change of technology, from manual to automatic, shows the progress of the sector,’’ says Alamin.

Some years back, according to Alamin, the number of service providers in the industry was limited. Additionally, the existing provider’s service rates were high.

‘‘Currently, however, there are a number of remittance service providers, which give the service at an improved rate. This encouraged the Diaspora to send more money to its home country,” he claimed.

But for Hana, who needs the money sent to her for the holiday, the problem is intolerable.

“I have encountered such kind of problems in the past, although I have changed service provider more than three or four times,” Hana said. ‘‘But, since I am using the service very frequently, I am facing the inconveniences redundantly.”

Remittance operators can potentially be involved in a number of functions in the chain of remittance transfers, states the research conducted by theInstituteofAfrican Economic Studies. In the Ethiopian case, however, firms tend to focus on just one or two at most. This, according to the study, can partly be explained by the lack of capacity (infrastructure, legal and financial) to handle the various functions.

The larger the network of the remittance service operators is, the relatively more straight forward remittance transfers will be. Hence, the greater the gain to the country, provided its large migrant population do send money, states the research.

The research also found that the formal procedure of getting a license and operating in the sector is not a major problem, at least on paper. However, implementation is problematic for most banks, especially to work with the private sector operators.

This is despite the Ethiopian law, which requires remittance service providers to deliver the remitted money within 24 hours of it being received. But for some, this can even stretch to several days.

Nevertheless, Hana, who recently switched to formal channels to receive her remittance, has no doubt that the money will come prior to the holiday. If not, she will simply fall into the abyss without the money.

“Since I have no choice, I will return each day until I receive my money”, Hana said in frustration, while leaving the premises of the Bank.

 


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