Ethiopia: Are Moves to Discourage Cash Hoarding Bearing the Opposite Impact?

opinion

Ethiopia's 2020/21 fiscal year has been quite different from its predecessors for the business community. The country's economy, tested by the impacts of the Coronavirus pandemic since last year, has been unpredictable more than ever largely because of unanticipated events including political instability and conflict.

Given the negative impacts of such unfortunate circumstances on the productivity of businesses, some waited for incentives that can reduce expenses and boost revenues while others wanted the government to keep the status quo until they recover. Abiy Ahmed's administration responded with a series of measures aimed at disrupting illegal activities hurting the economy.

Of all the actions, however, the rules introduced by the Central Bank had been widely felt. From the cash withdrawal limit to the demonetization, they have impacted business activities both positively and negatively. Only few insiders in the financial sector doubted the benefits of such measures to curb illegal transactions and cash hoarding, though there was much debate over the timing.

A case in point is the latest cash holding limit introduced by the National Bank of Ethiopia earlier this week. While the measure disallowed possessing more than 200,000 Birr in cash, it has affected businesses that require higher liquidity due to the nature of their work. This includes construction companies that have already been expressing their disappointment over the preceding cash holding limit of 1.5 million Birr.

"Applying one-size fits all approach is not good if the government wants to achieve a sustainable economic growth, which had been possible thanks to the impressive growth of the construction sector. The cash holding limit is no different. While its primary aim is reducing cash hoarding, its repercussions are putting a strain on our daily business activities," said Girma Habtemariam, an owner of a grade one construction company and chairperson of Ethiopian Contractors Association.

"Contractors usually require petty cash (roughly between one and 10 million Birr depending on the project) to pay daily laborers who want to be paid right after they completed their task and buy inputs swiftly to avoid delaying of projects. With 200,000 Birr cash on hand, even a small construction company with relatively easier projects would be constrained," Girma added.

Those engaged in horticulture sector have also raised a similar concern over the limit. "It is likely that the new limit will affect our ability to pay daily laborers who are banked and some live in an area where there is low access to banking service. So we fear it would impact the daily operations of horticulture companies and affect their productivity unless a unique approach is used to some businesses," said Tewodros Zewdie of the Ethiopian Horticulture Producer Exporters Association.

For National Bank of Ethiopia (NBE), on the other hand, the new limit is meant to discourage cash hoarding and is implemented based on the demand of commercial banks. Since the beginning of 2021, banks have been asking the NBE to reduce the 1.5 million Birr cash holding limit applicable on firms, saying the amount is too much and is undermining their ability to collect money outside the banking system.

"Aiming to ensure cash flow transparency and discourage cash-based transactions, we were asking the NBE to further reduce the cash holding limit and it accepted our request, which is a step in the right direction," said Asfaw Alemu, President of Dashen Bank. "This, together with the transaction limit, can play a big role in ensuring financial transparency."

Despite such hopeful sentiment, however, there is still doubt on whether the measures undertaken by the central bank would bring the much desired outcome - eliminating cash hoarding practices.

"What the government is doing and the reality on the ground are very different. Ever since the transaction limit was put into effect, for instance, many traders have been keeping cash in their lockers. Even some suppliers are demanding to be paid in cash as they transact more than the limit set by the Central Bank," said a retailer working at Merkato. The retailed added "Organizers of Ekub [traditional saving and credit mechanism] are now using their cash liquidity as a comparative advantage to grab the attention of many traders."

There is also claim that companies frustrated by the cash holding limit, which was applicable since last year, are now demanding their customers pay in cash and are avoiding making deposits because of the difficulty of making withdrawals and transferring money. Highly liquid businesses such as oil suppliers are also allegedly engaged in profiting from the high amount of cash they have on their hands.

Bankers working at main branches of commercial banks, including CBE, Awash and Oromia who spoke to The Reporter on condition of anonymity, explained they have experienced a fall in deposit from existing customers ever since the applicability of the transaction limit.

"This one time, we begged one of our customers who has an office nearby our branch to give us some money as there was nothing to even settle small withdrawal requests," said a CBE Branch Manager. He added "Cash liquidity is now an everyday challenge for us."

Another Customer Service Manager working at one of the high performing branches of Bunna Bank agrees. "Customers, especially those engaged in trade, are hesitating to deposit what they collect largely due to their inability to make more than five transactions a week, which is very low for most of them."

Such anecdotal evidences portray that there is still a long way to go in discouraging cash hoarding and currency outside banks, which has plummeted from 109 billion Birr in June 2020 to 64.6 billion Birr just few weeks after the demonetization became effective in September 2020. Although the figure is yet to be released by the NBE, it has further increased during subsequent months.

Meanwhile, aided by the currency conversion, commercial banks witnessed a 26 percent increase in deposit, reaching 1.2 billion Birr until the end of the first half of the existing fiscal year in December 2020.

"Although I cannot confirm whether the practice of cash hoarding has grown or not, it is visible that banks are now in a good position in terms of deposit mobilization. The issue of liquidity is also not as tight as that of last year," remarked Asfaw. He cited Dashen Bank whose liquid assets are 16 percent of its total assets.

A Senior Banker working at Oromia International Bank begs to differ. "Banks should not turn a deaf ear to the issue of liquidity. We cannot deny the fact that liquidity shortage at some private banks reaches at a point where they don't have cash to put in ATMs. This deserves the attention of the central bank and financial institutions," the Senior Banker recommended.

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