THE FOREX QUANDARY

One of Addis Abeba’s black markets for hard currency is also one within reach of the several branches of both public and private banks. People walking by are approached by ‘brokers’ and people seek out these exchange centresby foot or car and make their deals inside cars or in stores. When Fortune visited such a place for about half an hour on April 23, 2015, it observed 14 vehicles stopping by for transactions.

For a country that is increasingly constrained by hard currency shortages, with the ever widening balance of trade gaps, low export revenue and remittance flows, the shortage may appear to be minimal when visiting these places. But this shortage has forced importers to under invoice what they purchase from abroad. For instance, if an importer wants to purchase any commodity at a certain price, he can have access to certain amounts of foreign currency from banks by requesting a Letter of Credit (LC) but what the banks offer most of the time is less than what imports need.

Due to this shortfall, importers are forced to under invoice their commodities and collect the remaining currency from the black market so they can pay their suppliers in cash.

“It is really hard to access hard currencies from banks these days,” said one importer who declined to be named.

Banks are facing shortage due to a decline in revenue from coffee exports and the low flow of remittances via the formal market. Acknowledgement of this shortfall was shared by a senior manager of a private bank, who explained that the shortage was becoming severe.

The bank manager pointed to the unbalanced demand and supply of foreign currency with the increased number of government projects causing a shortage while having a major share.

It is a common scenario to have a shortage of hard currency throughout the financial sector in Ethiopia. But the timeline of the shortfall is unique in that it is unusually long; it has almost been three months since the shortage showed its first signs for this year, said the manager.

“Moreover, the time table in which those importers requested to open LC and the time when they finally got it is also very long,” the bank manager added.

Banks nowadays issue LC for their customers without having foreign reserve in their coffers and when they are asked to settle a payment to banks abroad, where the suppliers of imports reside, they have a hard time doing so. The importer claims that this problem often leads to tension between him and his suppliers

“I paid the Birr equivalent of 30,000 dollars to the bank and the bank had issued the letter of credit. In turn, the bank is expected to pay the money to my supplier in hard currency,” he said.

However, it has been more than one month since the bank – which the importer declined to name – failed to fulfil its commitment.

Such cases have made foreign banks lose interest in working with Ethiopian banks. There are even a few foreign correspondent banks that have sent letters of warning to their client banks in Ethiopia due to the failure by the latter to settle payments after issuing import LC.

CommerzBank Ag is one of the banks that have issued such a letter to its customer banks in Ethiopia to settle their payments, according to the same bank manager.

“We will not comment on this issue,” read the email reply by Martin Halusa, head of press at CommerzBank Ag, to Fortune’s request regarding the warning letter sent by the foreign bank.

CommerzBank Ag is a global banking and financial services company headquartered in Frankfurt, Germany. It has a representative office in Ethiopia, opened in 2007. The bank has been working with private banks such as Bunna International Bank S.C, Abyssinia Bank S.C. and Debub Global Bank S.C. as a correspondent bank.

According to the National Bank of Ethiopia (NBE) report of June, 2013/14, the gross international reserve of the country stood at an ability to cover 2.3 months of national imports.

Records by the International Monetary Fund (IMF) show that the reserve amount has been witnessing a sharp decline ever since, with the latest figures showing it could cover somewhere between 1.8 and 2.1 months of imports. This is far below the line of three months import value called for by any one economy in order to ward off blows that may stem from international trade.

Such data are confidential and can only be reported by the government, said the NBE, in response to Fortune’s request to gain access to data on the foreign reserve of the country.

“It is amazing to see a shortage in the current global context where the price of oil has significantly declined and where the country is expected to save a portion of its foreign reserves that it previously spent on oil purchase,” said a macroeconomist and a close observer of the financial sector, speaking to Fortune.

The decline in the global price of coffee and other agricultural commodities has also contributed to the problem, according to the macroeconomist. Again the relationship between imports and exports is not balanced and what is worse is that the trade deficit is still increasing.

This argument specifically in underperformance of exports is also shared by the president of a private bank who spoke anonymously.

According to www.ycharts.com, the price of Coffee Arabica at present is 3.544 dollars a kilo, down from 3.944 dollars last month and 4.720 dollars one year ago. This is a 10.15pc decline from last month and 24.92pc decrease from one year ago.

Ethiopia expects to produce 461,620tns of coffee this year, of which it expects to export 239,950tn for 862.55 million dollars. On its nine month performance report, the country managed to export only 110,284tn and collect revenue of 478.9 million dollars.

According to the National Human Development Report 2014, which was released by UNDP on April 29, 2015, the trade deficit of the country had increased to 8.4 billion dollars by 2012/13 from 5.5 billion dollars in 2010/11.

One other report by the NBE indicated that the trade deficit of 2013/14 had increased to 10.5 billion dollars from 8.3 billion dollars of the previous year.

In addition to the shortage in the foreign currency reserve, which is almost considered commonplace in the Ethiopian economy, players in the sector also mention mismanagement, corruption and artificial shortages as a bottleneck in the process of accessing foreign currency.

Mismanagement such as giving foreign currency inappropriately is visible in the banking sector and has been there for a long time, according to the aforementioned importer.

“At one of the local banks, I had requested 50,000 dollars and a guy at the International Banking Department asked me to pay 2.50 Br commission on each dollar,” claimed the importer.

Regarding artificial shortages and abuses, shareholders and exporters who are the banks’ clients currently influence the banks to dispense foreign currency to anyone whom they favour, as they are the ones bringing in the foreign currency. This creates a problem for other clients who are then unfairly treated.

Such corruption is rife and happens in full knowledge of the banks, said the macroeconomists and bank officials. There are abuses and leakages in the banking sector. Nowadays banks are going to the extent of working with the black-market in the exchange of hard currency.

Fierce regulatory measures have to be taken by the central bank in order to overcome such gaps. Moreover, strategies such as export diversification and value added processes must be developed to improve the supply of foreign currency. These measures have to be implemented beyond paper value.


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