As the government continues its efforts to squeeze the trade deficit, a new law limiting the forex available to importers is now in effect. Like all the other countermeasures post the devaluation, it has come as a blow to importers. Some claim it would only backfire and fuel the parallel market, while banks seem hopeful, writes SAMSON BERHANE, FORTUNE STAFF WRITER.
Lately, car stores located along the streets of Hayahulet and Qera, renowned for the overwhelming number of cars, have gone quiet. Business is not as usual. SMS motors, which until recently hosted dozens of vehicles, see its business receding.
For Simon Gidey, the major shareholder of SMS, everything was normal and going smoothly until a new rule limiting the foreign currency given to such businesses based on the price of the imported item emerged.
As an importer, his business depends on forex circulating in the economy. More foreign currency means more business for him and vice versa.
Although surviving in an economy characterised by high scarcity of foreign currency has been like squeezing blood from a stone for him and many other businesses in the capital, the latest measure is another hurdle.
“I don’t know how the banks will supply the foreign currency,” said Simon, who is required to deposit the equivalent of 7,000 dollars for a single car- over 20 folds of what he paid before the rule came into effect.
The new system became effective following the directive issued by the National Bank of Ethiopia (NBE) on December 1, 2017. It aims at improving the foreign currency shortage, a recurring agenda, and weakening the parallel market, thereby monitoring under-invoicing in the nation.
Some months back, Prime Minister Hailemariam Desalegn informed parliamentarians that the issue could persist for at least another decade.
Incessant forex shortages, chronic balance of payment crisis and colossal debt are becoming a common trait of developing nations. Especially for Ethiopia, whose consumption and local production is highly dependent on imports, adequate currency is a crucial determinant of its economy.
The forex crunch has been around for almost half a decade, restraining import businesses from fully realising their potential. The wait for getting adequate foreign currency has stretched from months to years.
It is not the commercial banks’ reluctance that has starved businesses of foreign currency, but the stagnant growth in exports and remittances exacerbated the need for more imports.
Data from the central bank shows export trade has lingered at around three billion dollars for the past three years, while remittance remained steady at four billion dollars.
Meanwhile, import bills have, as usual, increased from 13.7 billion dollars in 2013/14 to almost 17 billion dollars last fiscal year, stretching the trade deficit from 10.47 billion dollars to 14 billion dollars.
Such a deficit means the country can finance only 1.8 months of the import by its export proceeds – very low compared to neighbouring countries like Kenya, whose export revenues can at least cover three months of its imports.
With the aim of narrowing this gap, the government, in its effort to boost exports and control the exchange rate in the informal market, devalued the Birr by 15pc against a basket of major currencies in October 2017. A dollar is now exchanged for 26.9 Br, up from 23.4 Br.
Soon after, other rules followed. The foreign currency management directive required banks to approve a letter of credit (LC) based on the price of items, contrary to the decades-old practice. Since then, commercial banks are expected to refer the price list of Ethiopian Revenues & Customs Authority (ERCA) whenever they allocate foreign currency.
This, however, comes as a miscalculated measure for Mirgissa Amdissa, whose business relies on foreign currency. Mirgissa owns a mid-sized mini-van retail outlet, Dolphin Car Sales, at Qera.
“As the government is currently setting prices for the vehicles, we are no longer capable of negotiating with our business partners,” said Mirgissa, who has been in the business for more than eight years.
An expert with three decades of experience in the financial industry agrees.
“It is cumbersome for both commercial banks and businesses,” said the expert. “It can even result in over-invoicing as the price of items is not fixed in the global market.”
A senior bank executive shares this view. He doubts the applicability of such a system. ERCA needs to frequently update its price list of items from a volatile and fluctuating global market.
“If this continues, over-invoicing will be another challenge we have to face,” he told Fortune.
Vehicle importers and retailers were returning between 200 dollars and 300 dollars for a single car to open an LC. As such amount is not enough for import, the remaining balance would be covered by currency brought on the black market. Now, however, with the introduction of the new forex law, the chances to do as such are slim.
“Had we received foreign currency timely, we wouldn’t have opted for the black market,” said a car importer who spoke to Fortune under the condition of anonymity.
Such action of the importers was a headache for the huge companies that import and supply the vehicles through formal channels and procedures.
Gizachew Woldeyes, secretary general of Automotives, Machineries Importers & Assembly Sectoral Association, which has 11 members, explains how much they were challenged as a result of under-invoicing.
Nyala Motors, Race Engineering, B.H Trading & Manufacturing, Orbis Trading & Technical Centre, Marathon Motors and MOENCO are among the members of the Association.
“They import vehicles at a relatively quicker rate, using the foreign hard currency they obtain from God knows where, while we wait from six months to a year to process LCs,” he told Fortune.
The car’s price is estimated by considering the model of the vehicles and year of production to calculate the depreciation value.
To compute the cost of a vehicle used for a year, about 10pc of the original price will be deducted from the factory price, while 20pc will be subtracted for two-year-old cars. But, a vehicle used for three years and above would be subjected to 30pc depreciation value, according to ERCA’s calculation.
“Charging a similar rate of depreciation for a vehicle used for more than three years is not sensible,” said Mirgissa, citing a case where the Authority deducted 30pc depreciation for 12-year and three-year-old cars when he recently attempted to import one. “Thus, it is obvious that over-invoicing will result from such a scheme.”
Likewise, Angagaw Belay, managing partner of Indoven Car Sales, located off Djibouti Street, cannot see the logic of implementing one law to govern all businesses.
“Each business is unique on its own. So, I don’t believe applying a singular rule could solve the shortage,” he said. “Studies must be undertaken to assess the cost and benefit of the economy.”
Yet, the adverse effect of the new rule has already cast shadows on these businesses with prices of cars jacking-up between 100,000 Br to 300,000 Br depending on the type, model and the service year.
Besides inflating the current price of vehicles, the directive has also driven up the exchange rate in the parallel market, contrary to what it aimed for, according to the senior bank executive.
A dollar was exchanged for 31 Br before it came in to effect but soared to 32.5 Br, almost five Birr higher than the official rate.
As a result, banks are unable to cope with the increased demand for forex from their clients.
“Since then, the amount of foreign currency requested by our clients has increased,” the executive told Fortune.
But, Abie Sano, president of Oromia International Bank, is hopeful that these measures would eventually achieve their target.
“The tight laws from the central bank will deter importers from transacting currency in the black market, the gap will definitely narrow gradually,” asserts Abie supporting the new directive.
Nonetheless, the question of the prompt supply of forex amidst the crunch remains unanswered, jeopardising businesses of car retailers like Simon and Mirgissa. At the same time, the new directive seems a relief for the companies which import vehicles formally, as it will avoid the price cutting trend in the business.
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