Ethiopia’s Foreign Currency Crisis

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ethiopia Foreign Currency shortage
Forex crunch choking businesses in Ethiopia

By TesfaNews,

Ethiopia’s foreign currency supply available for importers and travellers alike is increasingly facing chronic shortages. As the country’s foreign exchange provision plummets into a whirlpool, the parallel or black market for hard foreign currency (which has become a rare commodity), is thriving in the country.

These are trying days for any business in Ethiopia. The undeclared but frequent power shedding on top of credit crunch from the financial industry, not to mention the bureaucratic hassle, is testing the patience of many business owners. 

The forex shortage is so critical that opening a Letter of Credit (LC) takes as long as one year or even more, and even then, there is no guarantee that the requested amount of foreign currency will be availed.

Sadly, Prime Minister Hailemariam Desalegn is ill informed on the state of foreign exchange reserve or its allocations in the economy. Almost every senior official in his administration privately admits that the crunch in foreign exchange provision has reached a painful level.

He may have in mind a pledge recently made by the Saudis to transfer a billion dollars in term of deposit. But it is a promise yet to be delivered.

The shortage has now reached unbearable proportions. Not even the pharmaceutical importers, the last frontier to be deprived of access to Forex, can get approval from their respective banks to open letters of credit.

Unlike the past couple of years when there has always been an issue with Forex, business owners are now confronted with the prospect of shutting down their factories.

The better option is to locate the source of Forex for their imports of raw materials from wherever it is available, and whatever is the going price.

The underground market has the going rate close at 25 Birr for a dollar, or 24.80 Br to be exact. The main culprits to the continued rise of the dollar against the Birr is not only the shortage in supply, but also the large appetite among some of the Chinese businesses which carry around stashes of cash in Birr to exchange it for dollars in the parallel market and take it out.

The main victims of the crises in Forex are indeed the domestic companies. Unable to operate their factories, some of them have already begun to have layoffs of their labour, including an elevator assembly company and a soap and detergent factory, according to sources.

Ironically, to put the blame for the strain in the economy as a result of unavailability of foreign exchange is an understatement of the gravity of the issue. Almost every commercial bank is suffering from its inability to mobilize as much domestic savings as it should. Thus, a credit crunch is on the horizon.

It should be disturbing to see that some of the private commercial banks have already stopped receiving applications for loans; privately, their senior officers admit that they are simply processing loans already in their portfolio and if they have to advance, they are discriminatory on the basis of whether the applicant brings foreign exchange through exports.

The national bank’s data highlight the distressingly widening trade imbalance which continues to haunt Ethiopia’s balance of trade. As such, the trade deficit was put at an estimated -6.27 billion dollars in 2009/10, -10.47 billion dollars in 2013/14 and roughly -6.6 billion dollars for only the first two quarters of 2015.

This imbalance has partly been caused as a result of slow-evolving export growth rates with falling commodity prices and lack of diversification in exports, loopholes underscored by the International Monetary Fund’s (IMF) report.

The incongruity of these all is that neither the officials at the central bank and ministers in the administration nor those operating in the private sector dare to call a spade a spade in public. While the latter choose to remain quiet for fear of official retribution, the former continue to deny the existence of the problem, but to the dismay of the public.

* Addis Fortune and Addis Fortune have contributed to the above story.