Forex Crunch: Easier to Address than Policymakers Claim

As in the misguided views that we are only using 10pc of our brain or one can see the Great Wall of China all the way from the moon, Ethiopia’s foreign currency problem has its urban myth.

The recurrent forex crunch has its causes as well as more straightforward means of addressing the problem, but this is rarely what we are told. The former Minister of Finance & Economic Cooperation, Sofian Ahmad, said that the foreign currency problem could not be solved in his lifetime. Considering increased life expectancy of Ethiopians, and the former minster’s middle-age, we can assume he meant three decades.

The problem can be solved in a year or two. The issue has more to do with regulations and attitudes than the supply constraint or trade deficit.

Foreign currency is abundant in the world. As a result of the 2008 financial crisis, the United State’s Federal Reserve and the European Central Bank have been printing dollars and euros under Qualitative Easing (QE) as if it is about to come out of fashion.

The European Central Bank has printed 700 billion Euros to rescue countries such as Greece. The Bank of England printed 445 billion pounds to rescue failed banks, and the Fed has produced three trillion dollars.

The good thing for Ethiopia is that countries such as China that has been receiving a great share of this printed money have been anxious that the dollar might lose its value, and have been kicking it back into the global market in exchange for real assets.

This anxiety can also be seen with the popularity of cryptocurrencies such as BitCoins. Capitalising on the anxiety of the “imminent dollar collapse,” digital technology’s advocates are selling cryptocurrency as an alternative to the Fed’s dollar and are pushing for it to be accepted in the mainstream financial sector.

It is in the sea of dollars and Euros that we are starving of the same currencies. The reason is that we are still following regulations that smack of socialist economic principles.

Most communist countries had our problems before the collapse of the Berlin Wall. But we are still talking about foreign currency scarcity 27 years after having opened the economy to foreign investment.

The problem is that regulators and policymakers have muddled two related but different concepts: Ethiopia’s trade balance and the foreign currency shortage.

A trade balance is what we export minus what we import, but foreign currency shortage is lack of acceptable medium of currencies to trade with foreign countries.

Ethiopia has a negative trade balance just like 80pc of the countries in the world. Those with positive trade balances have to send back the money to countries where there is a shortage in the form of foreign direct investment (FDI), tourism, and remittances.

If not, the global economy ceases to exist, with all the money being accumulated in few countries such as China and others having no currency to trade. This is mostly why China is showering Africa with cash, not because they want to do us a favour.

Countries such as Turkey, India, Egypt, South Africa, Kenya, the United States, United Kingdom, Brazil, and Somalia have negative trade balances, but they do not have a forex crunch.

Somaliland and Somalia do not suffer from a similar problem Ethiopia does either, even if their economy is based on exporting goats, cattle, banana and charcoals. Somalia is also the second biggest export destination for Ethiopia’s goods next to China. This should serve as an indicator that money has to go around whether the country has an export economy or not.

If one goes to Hargeisa, Somaliland, with a bag full of Birr, one can bring back the equivalent dollar. Dollars are sold on the street. The good news is Birr is happily accepted. The bad news is that the National Bank of Ethiopia (NBE) does not allow more than 1000 Br to be taken out of the country. The amount used to be five times less for over four decades.

If we accept the logic prevalent among current policymakers, it is only big exporters such as Germany, China, Japan, South Korea, Taiwan and Israel that have a positive trade balance and can trade. But even Somalia is trading with dollars and coming close to shelving its shilling.

Ethiopia’s shortage of currency was created by the system, as it was in Communist countries before the 1990s. The Birr used to be traded freely against the dollar even if at the time the nation had very little to export and there was no significant Diaspora community to remit or significant aid being sent by other countries during the imperial times. But in 1977, Ethiopia’s leftist government adopted a socialist economic policy to ration bread, oil, fuel and foreign currency.

The rationale behind rationing was that the world’s resources are limited, and the “bourgeois” have too much of it while the proletariat has none. But when we abolished the rationing of bread, we did not go without bread as the Marxists had predicted.

The foreign currency shortage is capture to the same mindset, and despite a change in government in the early 1990s, the exchange rate regime has not changed much.

Ethiopia’s trade balance deficit was close to 13 billion dollars last year, but the nation earns more foreign currency than that. Over four billion dollars’ worth of remittance is coming into the country. Add to this net official development assistance and official aid received in excess of four billion dollars, according to a 2016 World Bank data, and an equivalent amount that FDI brings. This brings the gap to around a billion dollars.

Ethiopia also exports power and the Ethiopian Airlines and the Shipping & Logistics Services Enterprise also earn foreign currencies. Billions of dollars are as well received from tourists and the commercial and concessional loans the country gets. The aggregate should more than close the gap, or at least, given the debts the nation has to settle, alleviate the shortage.

Then why the force crunch? And where does the goods’ export revenue fit into all of this?

The problem starts with having to abolish the unworkable directive on foreign exchange retention accounts, where 70pc of the account balance is converted into local currency within 28 days. If a coffee exporter gets a million dollars for exporting coffee, she has to open an LC to import things not needed such as a four-wheel-drive or lose 700,000 dollars after 28 days.

Restrictions on Diaspora investment are also a significant setback. It restricts them from investing in the financial sector. It also limits the amount they can deposit in Ethiopian banks to 50,000 dollars.

It likewise restricts Ethiopians working in international organisations from opening a foreign currency account. Thus, they are forced to putting their money in countries such as Djibouti or Dubai.

It could be naïve to assume that even officials working in Ethiopian embassies abroad or the staff of the Ethiopian airlines stationed outside the country will bring back their savings given a regulation that does not allow them to open a foreign currency account.

How then can we expect non-nationals to bring their hard earned savings to Ethiopia? And why limit the amount of money the Diaspora can bring in to the country?

We remain one of the few nations in the world whose banks refuse to take deposits.

Another absurd directive by the central bank is that Ethiopians travelling out of the country cannot take more than 200 Br for the last 41 years. Recently, the amount was increased to 1000 Br, but it only shows the poverty consciousness of the central bank in the face of a 72 billion-dollar economy.

We need to right a great deal of the systematic wrongs and resolve the foreign currency problem.

This can start by removing leftist economic policies when it comes to foreign currency regulation and making it more flexible. The central bank’s directive of the 28-day-rule is also regressive and extracts costs on the economy.

The restriction on the Ethiopian Diaspora to invest in the financial sector is similarly unhelpful. Our banks need to attract capital and grow before the impending liberalisation. Allowing more investment to come in the real estate sector by making more land available for lease to Ethiopians in the Diaspora community is another means of generating foreign currency.

We also need to issue at least a month or more days for conference visa and lift the requirement on 1.5 million Br capital to invite investors and business delegates into the country.

The nation is overdue for a stock-market to be set-up for the millions of passive investors to contribute to the development and for government to relax its monetary financing as well as the loans it takes.

This should go hand in hand with allowing Ethiopians that work for international organisations with a foreign currency salary to open a foreign currency savings account, lifting the restriction on the amount of Birr that can be taken out of the country and relaxing intrusive national bank regulations to give room for offshore banking strategy.

Our foreign currency problem is a regulation one and can be solved in a year, not in decades.

By Yared Haile-Meskel
Yared Haile-Meskel is a founder and managing director of YHM Consulting. He can be reached at 

Published on Jun 16,2018 [ Vol 19 ,No 946]



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