Addis Fortune (Addis Ababa)

Ethiopia: Parallel Banking Sparks Hard Currency Shortage

Until recently, Mekonnen Assfa, 26, sold tea and bread to taxi drivers, their assistants, commuters and passersby at the Bole taxi terminal, near Bole International Airport. But the increased flow of migrant workers from the oil-rich country ofSaudi Arabiahas opened quite another avenue of business for him and several others in the area.

The first group of returnees arrived atBoleInternationalAirportback in mid-November, following the announcement by the Ethiopian government that it had allocated 50 million Br for their evacuation and rehabilitation.

When the returnees come to him to request tea and bread, Mekonnen politely asks them whether they require local currency.

At the old Gerji terminal, where the returnees are kept temporarily, street vendors and other individuals roam around in search of customers needing to get their hands on some Ethiopian Birr. The business has also spread to photocopy service providers and cafes in the area.

Ahmed Ali, who was repatriated fromSaudi Arabiaon Wednesday, December 25, 2013, says he started the business after observing that there was a strong demand on the part of returnees for local currency.

"I had 100 Br and exchanged it with a returnee for 20 SAR," he told Fortune. "I then observed that it is a business that yields a good profit."

On Thursday, December 26, 2013, the Commercial Bank of Ethiopia (CBE) was buying one SAR for 5.07 Br and selling it at 5.2 Br, according to its official website. However, the parallel marketers around the Bole area were selling one SAR for up to 4.5Br.

All of the illegal traders approached by Fortune declined to disclose the profit they were able to gain as a result of the currency exchange.

But some at the parallel markets in the Gerji and Bole areas that Fortune observed on Wednesday and Thursday were selling it by reducing the official exchange rate by up to 20 or 30Br for 10 SAR.

The Addis Abeba parallel market hub around the Ethiopian Hotel is a different story. Marketers there are buying one SAR for between 5.25Br and 5.50Br. They also demand 50, 100 and 500 SAR notes, rather than one, five and 10 notes.

"I had no idea about the current exchange rate of the Birr when I gave 100 SAR to one of the street vendors, who was surrounded by crowds of returnees," says Tigist Berhane, a new returnee fromSaudi Arabiaat the Gerji area. "And the vendor gave me 400Br."

Tigist says she did not even ask him the current exchange rate of SAR, because it seemed normal for her to ask for the exchange while every other returnee was doing the same.

Anticipating this kind of problem, the CBE has opened a temporary branch to give foreign exchange services inside the old Gerji cargo terminal. Soon afterwards, Tigist knew more about the service provided by the CBE. This ended the temporary relief she enjoyed at finding the exchange in the parallel market.

"I came to understand that I was fooled all the while," she said. "You can easily exchange currency with no hassle and without worrying about any illegality."

Between the official and parallel markets, there is an average difference of 0.42 cents in one SAR. The black marketers around the Ethiopian Hotel are selling the SAR by 5.50Br, whereas CBE is selling it at 5.079Br.

Vendors approached by Fortune say that they understand the implications of the CBE presence.

"It has threatened the booming parallel market in the Gerji area," a café owner engaged in the business, who sought anonymity, told Fortune. "I do not think we will continue reaping as much profit as we have been doing recently."

The evolution of the parallel market, coupled with the already existing ones, have created a serious strain on the access to hard currency. Businesses engaged in import-export trade find it particularly hard to access hard currency. Importers, in particular, are complaining about the shortage of hard currency in banks.

"It is very challenging to find foreign currency for us," Adi Mohammed, an importer of cosmetic products, grumbled. "Sometimes you may observe that banks are unable to provide the foreign currency to its customers."

Other importers approached by Fortune lamented that the parallel market has significantly affected their access to hard currency.

"When the official market fails to provide us with one, we opt to go to the parallel market," said another importer, who sought anonymity.

Although differing in their view of how deeply the parallel market has been affecting their access to hard currency, representatives of private banks approached by Fortune agree that the existence of the parallel market affects the capability of banks to operate with the ample hard currency they require.

The existence of the black market strains government income gained from the banks' profit because 30pc is expected to go to the Central Bank in the form of profit tax. Since the government is importing fuel, medicine and other construction materials in hard currency, the expansion of the black market causes it to face a hard currency shortage.

Some say that the particular currency now on sale at black market spots, like the one in the Gerji area, SAR, weigh much less in international trade compared to the dollar or British pound.

"Some of the markets, like Gerji, are only temporary," says Neway Megersa, director of the planning and business development department at the Oromia International Bank (OIB).

He and others admit that importers have long suffered under a system of delayed and insufficient access to foreign exchange, because of the effects of the parallel market.

"Banks do not have enough to meet all their clients' demands, and since they cannot freely adjust the rate to match available supply with demand, foreign exchange is rationed and customers are obliged to wait in queues," says another banker, who requested anonymity.

The average spread between the official and parallel market in 2012/13 was 4.2pc, whereas 2,350 million dollars was sold to commercial banks in 2011/12 from the NBE, according to the gross domestic product (GDP) report.

The NBE's gross international reserves have declined; in 2011/2012 in stood at 2.7 billion dollars, while in 2012/13 it is 2.2 billion, according to the International Monetary Fund (IMF).

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