With illicit money transfer and money laundering raising red flags to its economy, Ethiopia introduced new banknotes earlier this week as a counter measure. On top of this, economists prescribe the expansion of mobile banking and fintech as the best alternatives to curtail illegal financial dealings.
Every year, the country loses piles of cash through unregulated channels resulting in illicit financial flow and posing security threats in the country.
The seizures of huge junk of money in Birr, USD and different currencies via different means have been stark indications of the looming danger that illegal money transfer poses to the country.
There are some corridors where large amount of money exchange takes place including the black market in broad daylight in Addis Ababa's streets. On the other hand, billions of USD makes its way to the country through informal ways potentially putting the country's foreign currency earning at risk.
According to a press release by Ethiopian Bankers' Association on May 20, 2020, around 113 billion Birr had been out of the banking system in April 2020. Also, according to scaling up Formal Remittance to Ethiopia 2017 report, a billion dollar transaction takes place via informal channels with 78 percent of the total remittance passing through informal networks in Ethiopia.
These and others were the precursors of the recent move by the government to change banknotes. Announcing the change, Prime Minister Abiy Ahmed lately said that many individuals have been stockpiling cash in notes across the country and the change was necessitated to tackle the problems.
Among the main reason for the banknote change is the economic crunch facing the country. Ethiopia should be relieved from the debt burden. The macroeconomic assessment that we made show that there is imbalance in the economy, Abiy added.
However, experts argue curbing illegal finical activities rests mainly on modernizing the financial sectors and expanding digital finance besides changing banknotes.
Despite the sharp growth of financial institutions with the number of branches by government and private banks reaching over 4,300, significant portion of the rural population still remain unbanked. According to the World Bank, Findex Report 2018 only 35 percent of Ethiopians has an account at a financial institution.
This figure is even smaller for young adults in the age bracket of 15-24 (28 percent) and the poorest 40 percent of Ethiopians.
The financial sector is very weak and cannot be competitive enough at the international level," said Zafu Eyesuswork Zafu a development Economist previously speaking to The Ethiopian Herald adding that poor infrastructure and internet connection are hindering the electronic banking service from thriving.
In its recent press statement, the Ethiopian Economics Association sees digitalization and fintech as the future and demonetization could contribute to accelerating it.
The recent demonization move by the government, according to the Association, could also reduce transaction costs and increase deposits and saving while it may also witness removal of fake currency notes and wipeout the stock of "black money" from the economy.
The Association predicts that the population with bank accounts increases, which could increase financial inclusion and an increase in government revenue as more taxable money is declared.
The country maintains closed door policy when it comes to the financial sector, despite this, some protection to local investments prevents the sector's modernization and improvement.
Avoiding excess regulation, allowing increased private sector participation and ensuring better incentives are the prerequisites to improve the sector. The first step should be taken by the government if any reform is to be carried out in relation to the sector. There must be a paradigm shift to bring the financial sector into new height.
There are two contradictory feature with regard to protection of banks. In one hand, Ethiopia claimed to protect the banking sector to only nationals, said Abiy, adding that the growth of the sector had been prevented by various polices measures, on the other hand. That was a point being raised in an ice-breaking meeting that I had with bank board chairs.
"We would not make the sector open to foreign firms until you come together with joint ventures and build your capacities as such firms with vast expertise and experience would engulf the sector which is at its infancy here."