Even though the National Bank of Ethiopia (NBE) has taken actions to stop black market trading of foreign currency, the price difference between foreign currency on the black market and in the banks has actually increased.
Previously the black market rate was 20 percent higher than the bank exchange rate because of the hard currency shortage.
Despite the fact that the government devaluated the birr by fifteen percent against major hard currencies on October 11, 2017 which meant that it was the same as the black market rate, the black market returned the favor and went up as well.
NBE has implemented a new scheme for approving letters of credit (LC). It stipulates that banks use the given price of items when they allocate hard currency.
The new scheme that banks adopted is that the LC amount that individual or companies request needs to be equivalent to the actual price of the imported items.
According to observers, the current gap between the legal market and the parallel market has reached up to 25 percent, the highest it has ever been.
According to information that Capital gathered, hard currency sellers are getting over 34 birr for a dollar from the illegal forex market.
However the legal market is buying a dollar by 27.22 birr. Experts are confused about this because the devaluation was expected to solve this problem in December last year NBE imposed a new law forcing banks to allocate hard currency for importers based on the volume of import items.
The law was expected to stop illegal remittances exchanged based on the rate of the black market.
It is believed that importers are asking the amount of a hard currency from banks that does not actually cover the volume of the total import items. Many believe that hard currency collected from illegal remittances from abroad is linked to the same importers that cover the balance cost of the import in addition to the LC that they get from banks.
For instance a company that imports 10 vehicles would get a LC approval from banks that only covers the price of two cars and the balance will be covered from the hard currency collected from family or friends abroad, who send the money from overseas to Ethiopia. When this happens a receiver in Ethiopia secures the money in birr at the black market rate and the hard currency is not transferred to the country but instead is used to import items.
But the new law that NBE imposed would fully cut this illegal action, since the importers are expected to import the product based on the real value estimated by the Ethiopian Revenue and Customs Authrority and the amount written on the LC. However the hard currency exchange in the illegal marker does not changed, according to experts. Even it has shown sharp increment in the past few months than the expected reduction.
Previously any importer who wanted hard currency for their import was not obliged to submit the price of the imported items at exporting countries’ markets.
For instance if an individual wants to import a vehicle that may cost USD 10,000 they would not be obliged to request the full amount for the vehicle purchase.
Under the current rules individuals or companies who want hard currency can get it from banks and the balance then is filled by different sources mainly from parallel sources or black markets.
According to ERCA over 5,900 items are imported from abroad.
The hard currency crunch that the country faces has forced the central bank to apply new rules and regulations regarding the management of hard currency and tackle the illegal business.
When the new NBE rule is issued experts at private banks told Capital that the NBE rule will contribute to increasing banks’ hard currency earnings and reducing illegal remittances, which are one of the major reasons for illicit finance flow.
Even though the issue has not been studied, importers are using finance from outside sources, who collect hard currency secured from illegal money transfers, for their imports, according Teklewold Atnafu, Governor of NBE, who spoke about the issue during his appearance at the Budget and Finance Affairs Standing Committee of the Parliament in December.
It has been confusing the banking industry. There are still other ways that either importers or people in the black market can game the system. “Most of the country’s hard currency earnings are illegally smuggled abroad,” an expert said.
In its latest statement the IMF forecasted that the country had enough hard currency reserve to last for two months. It had been 1.9 months in the past fiscal year, according to the IMF report. It is considered healthy for a country to have at least three months of forex reserves.