14 September 2017

Ethiopia: Informal Channels Raise Red Flag On Forex Earning

Photo: Dominic Bukenya/Daily Monitor
A man walks past forex bureau rate boards.

Beset by the ever expanding informal channels of remittance, Ethiopia may continue to grapple with shortage of hard currency unless swift and collective measures are put in place, 'Scaling up Formal Remittance to Ethiopia' report discloses.

A billion dollar transaction takes place via informal channels with 78 percent of the total remittance passing through informal networks in Ethiopia.

Some experts believe that the transfer of money through unregulated channels will also likely result in illicit financial flow and dealings. The seizure of 541,659 USD around Harar is a recent indication of informal corridors of hard currency.

Informal channels happen to be lophooles for global terrorism and corruption. It will open doors for illegal activities, people may use it to collect huge sums of money for their own dangerous causes, says Ethiopian Financial Security Director General Gemecu Weyema

There are some corridors where large amount of money exchange takes place including the black market in broad daylight in Addis Ababa's streets.

Informal flows not only cause loss of foreign exchange for the government, but also prevents it from tracking money laundering and terrorist financing and reduces the opportunities to encourage investment, says Leon Isaacs, Developing Market Associates (DMA) Global Chief Executive Officer who wrote the report.

While the Government has made great strides in recent years to increase the usage of formal remittances, informal networks remain prominent ways for Ethiopians abroad to send money back home, reveals the report.

Sending money to the sub-saharan Africa is the expensive. Ethiopia's money trasfer cost is lower than other sub-saharan countries but it is still too high as compared to the international rate. The average cost is around 10 percent which is so high. If it is able to lower down to less than up to two or three percent, customers will prefer to use formal ways.

Remittance is usually considered as low-hanging fruit for country's source of forex earning. It accounts 5 per cent of Ethiopia's GDP and a quarter of the country's foreign exchange earnings. Ethiopians remitted close to 4 billion USD in the last fiscal year alone. The value of remittance exceeded the country's export earnings in the first ten months of 2016.

On the other hand, billions of USD make its way to the country through informal ways potentially putting the country's foreign currency earning at risk.

Lack of access to services in the sender and receiver markets and high direct and indirect costs associated with formal channels force people to send remittance informally in addition to the regulatory barriers for undocumented migrants to use formal ways, adds Leon.

Some countries do not allow undocumented people to send money formally even if they wish to. In fact, there are also documented migrants, who are able to use formal channels but who, for a variety of reasons choose not to do so. In case of Ethiopia , they are either in Gulf States or South Africa which do not allow illegal migrants to send many legally. In this regard, Ethiopia, under many conditions can ,negotiate agreements with other countries to find the means for its illegal migrants to send money back home via formal channels, he also notes.

Ensuring the implementation of the National Financial Inclusion Strategy and prioritizing remittances as a specific tool for aiding financial inclusion and introducing awards and recognition schemes for top performing remittance companies are among the recommendations Leon makes.

Diaspora Engagement Directorate Director at the Ministry of Foreign Affairs, Demeke Atnafu for his part states, the Ministry embolden the diaspora to send money through formal channel and increase the volume of remittance.

"One of the priorities of our embassies is to strengthen link between money transferring agents with Ethiopian banks. The competition will decrease transaction costs and the diaspora can also have access to bank services easily" says Demeke. Conducting awareness raising porgram and showing the risks involved in using informal channels are also part of the tasks of the embassies. They also work to strengthen the link between money transfer agents in places where the diaspora reside, and the local banks. This would widen alternative banking services for the diaspora community, according to him.

National Bank of Ethiopia (NBE) Senior Adviser Elias Loha says access to bank is improving through time. The volume of remittance has already reached four billion USD. Diaspora's engagement in terms of investment and remittance is seeing upward trajectories.

Some banks including Commercial Bank of Ethiopia are trying open agents oversees. In a move to discourage the use of informal channels and lower money transfer cost, local banks were made to rule out commission payments. Remittance money services providers were also made to post their fees on the website of the NBE so that the senders could choose the best available option.

NBE is making policy adjustments and formulation to encourage the use of formal channels of money transfer. "Of course the informal channel has significant share at this time. We need to improve accessibility and reliability of banking services there by increasing the number of people using informal ways to switch to formal ones. Introducing new methods of money transfer with the help of modern technology should be at the top of agenda of institutions working on the area," he adds.

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