Rise in Parallel Forex Market Raises Concern

As shortage of foreign exchange intensifies in Ethiopia, many are forced to turn to the black market. This comes as local hotels appeal to the Prime Minister to help them lift advisories placed on the country as a result of the recent civil unrest by a number of foreign countries. In the mean time, the World Bank is calling for the devaluation of the local currency to help curb the shortages and kick-start the local economy, FORTUNE STAFF WRITER, DAWIT ENDESHAW reports.

“I don’t know who they are and they don’t know who I am,” says an illegal hard currency dealer, explaining his relationship to his customers. “We just exchange the currency. People come and go, just like that.”

For the past few months the gap in the exchange market between formal channels and the parallel market has been widening. People familiar with the issue argue that there is a massive demand on the parallel market for the buying and selling of hard currency.

On the parallel market, dollars are exchanged with a four birr difference from that of the bank rates.

The never-ending dilemma of a shortage of foreign currency is always haunting this nation. Former Finance Minister, Sufian Ahmed once commented that he did not expect to see the forex reserve shortage resolved during his tenure.

Although there is no real agreement about the cause of the increase in the rate gap, there is a consensus that the demand for the parallel market must have increased while supply was limited.

The supply side of the parallel market is assumed to be connected with currency from remittances, as opposed to formal channels. Moreover, the number of tourists flowing into the country has decreased because of the unrest in parts of the country and the declaration of a state of emergency.

Following the unrest, a number of European countries issued travel advisories restricting their citizens from going to violence-prone areas. This has had an impact on banks, where hard currency from tourists is traded and exchanged, according to a manager at a private bank.

Hotel owners in Addis Abeba have appealed for a lift of the travel advisories issued by foreign governments, and requested help and support from the government for their sector. This week, the hotels association submitted a letter to the Prime Minister’s office regarding the losses they have been incurring throughout the year.

Due to the drop in visitors, some of the hotels (that are also a source of hard currency) are unable to pay their loans, according to representatives of the Addis Abeba Hotel Owners Trade Sectoral Association. During the first quarter of the current fiscal year, Ethiopia reportedly collected 872 million dollars, which is seven million dollars less in comparison to last year’s.

And although it is just speculation, financial industry insiders claim there might be capital flight outside the country, especially with regards to the recent instability.

“Some people, especially foreign investors may be trying to send their money outside the country,” said a senior international manager at a private bank, who asked to remain anonymous. “Although the tourist inflow has also affected the supply to the parallel market.”

The trend of under-invoicing import items may also contribute. Under-invoicing is the practice of declaring a lower than actual price on an invoice for import items. The difference is then paid to the seller in cash. The only way to fill the margin is by accessing hard currency from the black market, according to the manager.

Specifically, it is done using Togo-Challe; the illegal exchange of cash along the Ethio-Somali boarders.

This transaction is specifically done when hard currencies are transferred into the country via the formal channels. The currency is then transferred to banks in nearby countries where it can be withdrawn in different currencies. The hard currency will then be carried into the country and traded in the black market.

Importer/exporters go to forex dealers, buy hard currency and use it to import and export different commodities. The importer/exporters receive money from outside the country as advance payment for their goods, and declare the money to bring it into the country.

“This is usually done to inject the currency into banks. It is another form of money laundering,” says the IBD manager.

The issue of Togo-Challe was once raised by senior bank officials in a meeting chaired by one of the vice governors of the Central Bank in August 2016. The response from the Bank was that the issue was under investigation.

Other bankers argue that the reason for the increase in demand in the parallel market is the changes to banking policies that mandate a first-come first-served forex policy. Exporters who used to be given priority at banks to receive hard currency are flooding to the parallel market.

“People are also speculating about the devaluation of the birr, especially after the suggestion by the World Bank,” said an importer and investor involved in commercial farming. People want to keep hard currency on hand.

On December 6, 2016,World Bank released its fifth Ethiopian economic update. One of the pertinent issues raised at the meeting was the World Bank’s suggestion of devaluing currency. Government officials, including the Vice Governor for Monitoring Stability, Yohannes Ayalew, decried the idea of devaluing the birr. His argument is that devaluing the currency has more of an unpleasant impact than a positive one.

Alemayehu Geda, a professor of economics at Addis Ababa University, conducted a study in 2010 about the devaluation of currency.

“What I found out was that devaluing the currency resulted in inflation,” he told Fortune.

The last time the government devalued the currency was six years ago. The 20pc devaluation caused a 40pc increase in inflation, according to Alemayehu.

“Devaluation is not a solution,” he argues. “Emerging issues such as the unrest might be affecting the foreign currency situation we are seeing.”

“The public’s perception of the government affects the currency market. It’s not right,” according to the professor. “Everything has to be market driven.”

On the other hand, some economists argue in favour of devaluation.

Although officials openly criticize the idea of devaluing, the real effective exchange rate (REER) has appreciated in cumulative terms by 84pc since the nominal devaluation in October 2010.

However, the speed of appreciation slowed down over the past six months; the appreciation between July and August 2015 was 24pc. The appreciation slowed to eight per cent in June 2016. This was primarily caused by two factors: first, a relative decline in the rate of domestic inflation, and second, the depreciation of the U.S. dollar relative to other currencies since January 2016.

With the banks feeling the crunch, the allocation of foreign currency is more important than ever.

“It’s just like small drops that we give to those who need it most,” said a Vice President at a private bank. “There are even some banks that have stopped giving hard currencies for travellers.”

In the last fourth quarter of 2015/16, forex bureaus in commercial banks purchased 78.9 million dollars and sold 54.3 million dollars foreign exchange.

One dollar is traded at 26 Br to 27 Br in the black market. At banks, the rate is four to five birr lower.

Another importer who spoke to Fortune on the condition of anonymity would like to see foreign currency exchanges opened to the private sector.

“Like many countries do these days, Ethiopia can also allow the private business owners to trade in foreign exchange,” says the importer. “I believe this will at least ease the shortage.”





Published on Dec 13,2016 [ Vol 17 ,No 867]



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