14 July 2018

Ethiopia: Parallel Market Exchange Rate Weakens, Banks Celebrate

Photo: Premium Times
(File photo).
column

The black market for hard currencies operates outside the rules and regulations set by the authorities. While the official exchange rate for one dollar has been set at 27.5 Ethiopian Br, the black market rate had peaked at a historic rate of 36.6 Br. However, the last two weeks have seen a significant decline of 19.4 pc in the black market rates. Subsequently, a slight increase in remittances and forex supplies has been witnessed in the mainstream financial sector, writes BEHAILU AYELE, FORTUNE STAFF WRITER.

A young man in his early thirty's was waiting in front of a kiosk for customers to exchange their foreign currencies outside the formal channels. His business has been booming for much of this year.

With the black-market exchange rate 30pc higher than the formal market, he never lacked customers willing to risk breaking the law. The past two weeks though have brought unexpected changes. A dollar that used to sell for 36.6 Br has suddenly fallen to 29 Br.

"There have been price fluctuations before, but this one was different," said the young man, "it went spiralling down ever since Prime Minister said that prices would decline."

Prime Minister Abiy Ahmed (PhD), defending the federal government's budget for the new fiscal year, had indeed indicated that black market rates would decline, and those who are hoarding foreign currencies should brace themselves.

It was not the first time that Abiy had mentioned the black market. In discussion with business leaders at the Sheraton Addis Hotel back in April, he has referred to the black market trade that takes place behind Ethiopia Hotel, on Yohanes Street.

"The Prime Minister's words had an effect," said Yirga, who was looking for customers behind Ethiopia Hotel.

Macroeconomists such as Eyob Tesfaye (PhD), who has a vast experience in the financial industry, do not agree.

Political instability incentivises people to take their monies out of the country; shortage of foreign currency supply forces businesses and individuals to look for alternative means of acquiring it; and speculation of devaluation encourages people to hold reserves to exchange at a later time, according to Eyob.

Two of these have happened. The nation had been gripped with political unrests for the past three years until they subsided after Abiy's assumption of office.

Similarly, the shortage of foreign currencies has persisted throughout this year. Manufactures and exporters have been forced to wait up to a year to open letters of credit (LC).

In mid-June though, Ethiopia secured a three billion dollar financing agreement with the United Arab Emirates (UAE). While two billion dollars will be invested in agriculture, tourism and renewable energy, the rest will be deposited at the National Bank of Ethiopia.

Eyob believes that these developments, as Abiy had suggested during his appearance before parliament, have changed the course of the black market rates.

Until this paper went to print, a dollar was selling for 29 Br and being bought for 30.5 Br. The pound and euro have also been hit. In the last three weeks, one British pound, which has been selling for 44.6 Br has declined to 36.8 Br; and the Euro, which sold for 41.5 Br is now selling for 33 Br.

This has been detrimental to Hanna, who preferred to have her surname withheld. She came from Saudi Arabia with Saudi Riyals in tow, but she has decided for now not to exchange her money in the black market.

"I used to exchange one Saudi Riyal for nine Birr. It has now dropped to seven Birr," she told Fortune. "I have decided to save it until the rate rises again."

Another businesswoman who used to visit Yohannis Street had noticed the effect, too.

"When I went to a bank to get dollars for international travel a while ago, I was told that they do not have any. After exhausting my choices, I was forced to buy a dollar for 34.6 Br," she says. "But, when a family member went to a bank last week, they were able to get 3,000 dollars."

Ketemaw Abebe, manager of Addis International Bank's Gandi Branch, admits that they have more foreign currency inflow now.

"Mid-week, people have begun to come to the bank to exchange cash, which is a rarity for us," Ketemaw told Fortune. "We are also witnessing more remittance transfers."

Amount of foreign currency that is being generated has shown a gain at one of the mid-level banks. The private bank would normally collect 4.5 million dollars to six million dollars a month. This month, they have already collected six million dollars - the management emphasises that this may not be as a result of remittances alone, but may be due to other foreign currency injection, say from exporters.

The past two weeks have also seen a relaxation of supplier's credit facilitation procedures.

"The process used to take more than a month, but this week I was able to process a permit in a day," said Biniam Abraham, CEO of Biniam Abraham Import & Export.

For macroeconomists such as Eyob though, the forex crunch is far from over. He holds that the decline in the black market rates emanates from the very reason that it flourished in the first place.

"People are starting to believe that there is more stability in the country - growing more confident by keeping their assets at home - their demand for dollars has decreased," he says. "And besides, the speculation that there is a shortage of foreign currencies has gradually begun to fade."

Policymakers have long emphasised Eyob's point - the foreign currency shortage cannot be addressed by factors such as increases in remittances. Subsequent administrations, including this one, hold that reducing the nation's trade deficit, which stands at well over 10pc of gross domestic product (GDP), is the most effective tool.

"We have to boost our export earnings, and speed-up import substitution," Abiy had told legislators.

Export revenue for the past three years has stagnated at around three billion dollars. This is despite growing imports, which only last year showed declines, leaving the country with almost 13 billion dollars of trade deficits.

This year's export levels have also had rocky starts, with only 2.6 billion dollars having been generated in 11 months.

Black market traders are not holding their breath either. They believe that the price decline in the informal sector is temporary.

"It may not pick as dramatically as it has this year, but it will soon regain an adequate lead to get customers to come back to us," Yirga said.

Fortune's repeated effort to get a response from the National Bank of Ethiopia (NBE) bore no fruit.

Ethiopia

PM Ahmed Announces His New Cabinet

Prime Minister Abiy Ahmed is announcing his new Cabinet. The new ministerial portfolio will have a record number of… Read more »

See What Everyone is Watching

Copyright © 2018 Addis Fortune. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.

AllAfrica publishes around 600 reports a day from more than 140 news organizations and over 500 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.

Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.