22 April 2018

Ethiopia: Forex Crunch Issue of Policy, Not Policing

opinion

Abiy Ahmed's meeting with leaders and members of the private sector earlier last week showed where his priorities lay. The fourth public appearance since parliament confirmed him as a Prime Minister, his dinner at the Sheraton with no less than 300 businesswomen and men demonstrated his commitment to fixing what ails the national economy.

It was a commendable move on his part, setting the agenda that addressing unemployment and generating forex to the economy are areas where the private and public sectors can see each other eye to eye. Yet, so much can be deducted from both his scripted and unscripted talks, but hard to discern where his core conviction lays.

Not many businesspeople attending the dinner were as impressed by his eloquence as the nation was captivated by his inaugural speech three weeks ago. No less were members of the private sector unimpressive in their issues raised before the newly elected Prime Minister. They were bogged down on micro and company-specific matters. Abiy could have avoided the trap of being transactional in his approach as he could have demonstrated his grasp of macroeconomic policy issues.

Alas; he chose to let an opportunity pass to set the tone that could define his administration. Such debut with members of the private sector could have been used to steer clear of whether he will be a leader to take the path of continuity or stand up to be counted as a reformer. One crucial area that has been hammered by businesses at the dinner was the painful and disabling crunch in forex. Granted, this is an area where significant policy reforms are needed.

The Prime Minister was seen navigating high in acknowledging the structural nature and the near permanence of the problem. Nonetheless, the thoughts he reflected in some of his responses were transactional. Not that many businesspeople were made to feel that he may, after all, have a regulatory mindset that is detrimental for businesses to thrive.

Abiy appears to believe the thriving of the parallel currency market would be one source of the problem, if not the many businesspeople who have allegedly stashed their cash with banks in Dubai. He implored on them to repatriate their money without ever giving adequate credence to why indeed they prefer to keep their money overseas.

He even threatened to crack down on the parallel market robust on Yohannis Street, in the neighbourhood behind the Ethiopia Hotel, in Addis Abeba, as a series of measure to address the currency crunch. While fixated on policing the behaviour of businesses, Abiy seems to have overlooked the issue of why such a market would exist, to begin with.

It took over a year for managers at the state-owned Commercial Bank of Ethiopia (CBE) to respond to the letters of credit applications from 1,650 importers, with a total value of 300 million dollars. Importers though remained unsatisfied, complaining that it is too late, not to mention far less, to what they had expected. The CBE was only able to avail 10pc to 20pc of the foreign currency importers had asked for, only a third of the amount the Bank availed a year ago.

A report by the International Monetary Fund (IMF) for the last fiscal year shows that reserves stand at 1.3 billion dollars, although there are those who claim that the reserve has been dwindled alarmingly since then. This is for an economy that supports an estimated over 100 million people, covering only 1.8-months worth of imports. Abiy too has figures that stress the severity of the issue. He told businesses that the hard currency revenues the nation is receiving are failing to satisfy even half of the 17 billion dollars in bills.

It is unavoidable for officials giving the issue the weight it deserves. For an import-dependent nation, where the stock of foreign currency ensures the availability of critical goods such as fuel, wheat and medicine, the last of which is already scarce, there is not an economic challenge that can divert away from the administration's attention.

Regrettably, the dinner has produced no meaningful output the attendees had expected. It was yet another indication that the administration is unwilling to budge from the policies that have led the country down this path. The focus remains too concentrated on what the authorities see as a failing of the private sector and their temptations in resorting to the parallel market.

This is despite the fact it should. The dollar was selling for over 34 Br on the black market last week, compared to the lower value of the national currency on the legal exchange rate that is close to a quarter lower. Such a gap is bound to concentrate foreign currency in the parallel market - out of the hands of the central bank - as people would be predisposed to exchange most of the remittances they receive for the sake of a higher value. Importers are thus justified in their protestations.

The authorities should not turn a blind eye to such offences, as a means of giving breathing room to the private sector. What they ought to do is stop strangling private players and allow them to be able to breathe without the assistance of the black market. There exists the impractical mindset that businesses are bound to public service even at the expense of their bottom line. That was an area where the Prime Minister tried to claim the moral high ground, preaching the gospel of corporate social responsibilities and the virtues of volunteerism.

While corporations should feel responsible for the well-being of communities where they do business, it is unfair to ask business leaders to stick to Ethiopia even in the instance where it would be unprofitable to do as such.

Milton Friedman, that stalwart of economic liberalism, once quipped, "There is one and only social responsibility of a business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

Equally, the ultimate responsibility to ensure the welfare of the public lies with the state. Individuals and owners of businesses should be required to abide only by the laws of the land. But they cannot be the ones to take the blame when the macroeconomic situations of a country deteriorate; when inflation is high; exports are too low; skilled workforce is scarce; and, income per capita is falling.

This is especially true for a country with a state-centric economy.

Few businesses would find sense in repatriating currency to Ethiopia, a country which does have a current account that is not open to let the free movement of capital in and out. The forex regime is inflexible, creating multiple headaches and inconveniences for those nationals with the buck kept overseas.

This is not to mention the political instability and high inflationary pressure the economy grapples with. The Prime Minister believes that it is alright to condone the black market on the streets of Addis Abeba and use it as leverage against the business community. It is a reductionist approach devoid of a rulebook to address the issue at a structural level and from the source.

The right to property enshrined in the constitution should apply for the right to keep property wherever in the world it is deemed appropriate and is allowed to do as such. The state's sole purpose here should be to make the doing business environment as conducive as possible for capital to be repatriated on its terms. As long as businesses are bullied, or mishandled, they would find ways to keep money out of the hands of the state and operate in an environment where the rules do not apply - either the black market or accounts in foreign lands.

Letting foreign banks operate in the country for businesses to access hard currency through loans would be an excellent place to start attracting fleeing forex. Making the forex regime more flexible and allowing it to float on a competitive market would be even better.

Policy reforms such as these, especially in the monetary front, would undoubtedly be painful to adopt, not to mention politically damaging for a nation that will face general elections in less than two years' time and a ruling coalition that has been unpopular. It will also require surrendering some of the EPRDFites' dogma in developmental ideology.

There have never been shortcuts to economic growth short of leaders' determinations to embrace hard-hitting reforms. The great test of the new administration will be its preparedness to improve the state's relationship with the business community. It ought to be understood that what ails the nation is the inefficiency of the former and the trivial size of the latter - not the other way around.

Policing can only be one more addition to the problem.

Ethiopia

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