Despite the efforts by the government to curtail the illicit flow of money in the economy, the parallel market does not show any sign of succumbing in the long-term. Enforcement efforts should be met by effective policies to arrest the problem, writes Sharew Erkehun (email@example.com), a public policy analyst.
Even after Prime Minister Abiy Ahmed’s (PhD) warning against the parallel market, Ethiopia’s economy has continued to grow side by side with it. After his speech in parliament where he defended this year’s federal budget, there were some encouraging responses regarding the parallel market.
Commercial banks received millions of dollars in cash, quenching some of the foreign currency thirst the country suffers from. And for a few days, the exchange rates on the official and black markets were relatively the same. Unfortunately, there was never any meaningful policy behind the decline, and the gap has returned.
Last week, police began raiding shops suspected of engaging in black market trade of foreign currencies. But this, as experience would have it around the globe and in Ethiopia, is not a long lasting remedy. Enforcement alone will not work. The informal market, where goods including hard currency are traded, are unlikely to go away without a targeted policy prescription by the government.
Economists have argued that scrapping physical currencies will help governments fight the black market trade more meaningfully. In every major criminal and tax evasion enterprise, cash plays a prominent role, merely because it is liquid, easy to carry around, can be traded without alerting authorities and will have value at least within the region of the country that owns the currency.
The same goes for the parallel market and contraband businesses in Ethiopia. Their preferred mode of transaction is cash rather than through banks. Here, higher denomination bills, such as the 100 Br bill, will undoubtedly play a significant role. It helps move large transactions with much more ease than would have been the case otherwise.
A good example would be the United States, where over four-fifths of the dollar is denominated in 100 dollar bills.
This amounts to “$4,200 for every man, woman and child,” Kenneth S. Rogoff, a former economist at the International Monetary Fund in his book, The Curse of Cash, tells us.
This is despite the average American reporting to hold just one-seventh of that amount of physical currency at any one time. Only a fraction of the 1.3 trillion dollars that was in circulation in 2015 in the United States can be accounted for. Where the rest of the 100 dollar bills are can only be speculated.
It may be the same in Ethiopia. Since it is easy to use the 100 Br notes compared to others, it would be preferable for businesses in the informal market to handle transactions through this denomination.
If the nation wants to combat crimes such as the parallel currency market and contraband at their root, scrapping or at least changing the 100 Birr notes should be part of the strategy of the government.
Countries such as India tried demonetisation of their two highest denominations to strike the heart of untaxed and unaccounted for wealth. The European Central Bank is also phasing out its 500 Euro notes, nicknamed the “Bin Laden” for being difficult to find in circulation despite their presence and appearance being recognised. The EU said that their increasing use for illegal purposes could not be ignored.
Eliminating or changing higher denomination currencies in itself will not address the problem of the parallel market though. This is why India’s demonetisation attempt is not considered a success.
Demonetisation or changing of the 100 Br notes will only be the first stage of curtailing the parallel market. Much of the wealth that has been gained through illegal activities may not be held in cash. It may be in the form of gold, real estate or land. Changing the currency, therefore, can still be exploited as all illegal traders or contrabandists have to do is sell assets. Such an effort by the government has to be followed by effective enforcement and laws.
Worldwide, through human smuggling, fraud, illegal flows of money and especially drug trafficking, an estimated two trillion dollars is laundered annually.
Such businesses, given that much of their mode of transaction is cash, are persistently hungry for money. Therefore, there should be a law to limit the amount of cash individuals or business entities can hold at any one time or withdraw based on parameters of size and accessibility to financial services. Payments after certain cash thresholds also need to be done strictly within the banking system.
Such policies, however, have their own cost. Printing new Birr notes is pricey, and limiting the amount of cash that individuals and businesses can withdraw and hold will reduce the velocity of the circulation of money, slowing down the economy.
It can only be remedied through the growth of electronic banking and better accessibility to financial services for citizens. Nonetheless, since such illegal businesses have become a source of economic and political instability in Ethiopia, the benefits of putting in place such policies will outplay the cost.
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