Businesses Buckle Under Forex Crunch

Foreign exchange shortage has been gripping Ethiopia for almost the past decade. Essential imports, such as medicine and grain, as well as forex generating industries such as manufacturing have been receiving priority to access foreign currency. The country's swift economic growth and the growth of its manufacturing sector has put pressure on foreign currency reserves; a situation which is not expected to be alleviated for another 15-20 years. However, smaller import businesses, such as furniture and gift importers are being left behind and made to rethink their business models, as MENNA ASRAT, FORTUNE STAFF WRITER, reports.

Colonial Décor Furniture, a business that sells imported household furniture from Indonesia, will temporarily cease operations after 15 years. Soaring rents and slowing business have forced Habtamu Semu, the owner, to put the business on hold.

The shop imports its furniture from Indonesia through a dealer who lives there. The shop receives around three containers a year. Now, however, the shop only receives one container every 12-15 months.

“We have a very niche market,” says Ashenafi Mengistu, the manager of the store. “Our customers are mostly foreigners and Ethiopians who have returned from abroad.”

The shop has a smaller customer base than most other shops, which, combined with the increasing scarcity of the foreign currency the shop needs to import its items, it’s becoming harder and harder to keep the business going.

“It’s hard to get the currency we need to pay for everything. We’ve gone to all the banks, but this kind of business is becoming less sustainable,” explains Ashenafi.

This isn’t the first business that is feeling the effects of the foreign exchange crunch. With the industrial and manufacturing sector being prioritized by some banks for foreign exchange, smaller businesses are being left farther behind.

Gift shops, which often import their merchandise from abroad, are also noticing that importing is becoming more difficult. One of these shops, which sells not only gift items but certain household items, is finding it harder to keep up with their costs in a time of lowered tourist numbers and foreign exchange supply.

“All our stock is imported,” said a gift shop owner who asked to remain anonymous. “Business has been down generally lately. But we are finding it difficult to keep up with our costs.”

The shop used to receive shipments two or three times a year. However, now, the frequency has dwindled to one shipment every year, and the owner worries that it may mean the end of the 10-year business.

Importers, who spend and do not generate foreign currency, getting priority from the banks has proved to be a hassle, according to some importers.

“Exporters and industries get priority,” says one importer who wished to remain anonymous. “These are activities that generate foreign exchange, so the banks do everything they can for them, and not for importers.”

Certain imports, such as grain and medicine areas that are prioritized.

“Imports are classified into essential, and nonessential,” says a veteran of the financial and banking industry with over 20 years of experience. “Essential imports like medicine are rightly given priority when forex is scarce.” However, this doesn’t give people many options when it comes to alternative ways to finance their imports.

Black market currency was one of the ways that the Addis Abeba community is trying to cope with the foreign exchange shortage. But now, even that avenue is becoming more and more narrow. With new regulations governing foreign currency flows into and out of the country, the black market is no longer a reliable method of financing imports for smaller businesses.

Prior to the implementation of central bank regulations on foreign exchange, business people could carry out some of their business with foreign currency obtained on the black market, whether directly or through partners.

“Businesses used to be able to buy forex on the black market, which they would then deposit in their own accounts,” said a currency dealer. “It made it a little easier to open letters of credit at their banks, but that practice has been stopped now.”

The problem is also political according to some black market currency dealers.

“People were afraid when the unrest began,” said another dealer. “Business people started looking at ways to get their money out of the country, which caused issues with foreign exchange flows.”

Stemming the illegal flow of foreign currency through neighbouring countries into and out of Ethiopia is one of the priorities of the government.

Focus on large scale manufacturing and the export sector means that smaller businesses are being left out in the cold.

“There is no real way to fix the situation except to look seriously at devaluing the Birr to become more competitive on the international market and help reserves recover,” says the financial industry expert. “Other than waiting, businesses don’t really have any options right now. Those who can’t afford to wait out the crisis will probably be forced to close.”

The foreign exchange markets in Ethiopia have always been volatile. The exchange rate of dollars in the foreign exchange market was around 21 Br in 2015/16, which was a five percent annual depreciation. The total foreign exchange traded between banks in the first quarter of 2016/17 was one million dollars, 1.6 pc lower than the same period in 2015/16. The traded currency was solely provided by the National Bank. Foreign exchange reserves reached 3.5 billion dollars at the end of August 2016, partly due to a one billion dollar deposit into the central bank from Saudi Arabia in December 2015. The reserves only cover two and a half months worth of imports.

The World Bank recommended caution for the export sector because of its vulnerability to trade shocks, which would need to be carefully managed. The last year has shown a slight decline in the revenue brought in by exports, due to fluctuations in international commodities prices. In the first five months of the current fiscal year, earnings from exports amounted to one billion dollars, five percent lower than the preceding fiscal year.

Other countries in Africa are also experiencing shortages of foreign exchange. Last week, the CEO of Ethiopian Airlines told Reuters that the airline was unable to repatriate about 200 million dollars held in local currency in Nigeria, Egypt, and other countries because of a shortage of foreign exchange.

Companies in Ethiopia meanwhile will have to play the waiting game for the export market to stabilize and foreign exchange reserves to improve. Prime Minister Hailemariam Desalegn, in his press conference with local media a few weeks ago, said that the foreign exchange shortage would last for the next 15-20 years.

In the meantime, exploring alternative businesses seems to be the only way for businesses to stay afloat.

“We are starting an injera business while the furniture business is on hold,” says Habtamu, the owner of Décor Colonial. “We are hoping to start exporting it. The foreign currency that comes from that will hopefully help put the furniture business back on its feet.”




Published on Feb 13,2017 [ Vol 17 ,No 876]



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