Concerns rise over franco-valuta policy as illicit forex market flourishes

By Muluken Yewondwossen

It has been claimed that the Franco-Valuta openness policy, which was implemented in conjunction with the macroeconomic reform and liberalization of the FX market, has given illegal actors a way to channel foreign exchange through their illicit scheme. They said that it would be challenging for the authorities to taint the black market.

Experts in the field, such as importers and bank executives contacted by Capital, claimed that those operating at major borders are the ones who create the illegal foreign exchange market.

The government has liberalized the exchange rate in relation to the reform, which takes effect on July 29. This allows the market to establish the exchange rate based on the market or the interests of traders (individuals and banks).

The government reported that since the reform went into force, the gap between the legal and parallel currency markets has shrunk to three percent, according to a statement by Mamo Esmelealem Mihretu, Governor of the National Bank of Ethiopia. In addition, the inward remit has increased vertically, which has enhanced banks’ liquidity.

Experts in the field, however, assert that the forex market is being impacted by some of the government’s actions made in relation to the reform.

Specifically, they emphasized that the government’s Franco-Valuta strategy is indeed acceptable.

“The idea behind the government’s decision to launch the Franco-Valuta plan makes sense because the free flow of products and services is essential to a market economy, but the choice was made relatively early,” they said.

Before the reform, relatively few necessities were subject to the Franco-Valuta, while other items were meant to be imported after the official banking process.

Through the Franco-Valuta scheme, foreign exchange is accessed outside of the banking system.

The freedom to transport goods and services is what motivates the Franco-Valuta.

Zemen Bank President Dereje Zebene claims that it is not necessary to adhere to the same bureaucracy as the banking system.

“In the formal system, an importer needs to meet certain requirements set forth by the bank and provide various documents,” he continued.

According to experts, people prefer simple ways to obtain foreign exchange. “And as long as the country allows the payment instrument that the importer uses to buy the goods, anyone can import small to large goods or services without any preconditions,” the experts stated about the Franco-Valuta scheme.

“Controlling it is challenging; therefore, in the absence of a system to verify the resource’s source, it will serve as a haven for illegal activity and promote a parallel market,” they clarified.

“You’re supposed to ease the requirements at banks since you opened up the Franco-Valuta, which may access foreign currency from informal sources,” Dereje told Capital.

“Improving the legal system’s liquidity is also essential to reducing illegal acts,” he added.

According to him, most merchants would choose to employ the most straightforward scheme, regardless of how the revenue administration decides to handle the tax inquiry.

As the government opened up the exchange rate, importers told Capital that the goal of implementing an effective Franco-Valuta was to permit the free flow of goods and services.

“This is good, but the concept is misinterpreted in the market, and some traders are abusing the opportunity to evade even some legal responsibilities,” the importers said.

As one of the importers put it when he asked to remain anonymous, “If you open another alternative, they will also go that way if it is better.”

“The liberalized exchange rate will draw individuals seeking true value for their money, but if they have other options, they will pursue them, which will not be consistent with our current circumstances,” a banker stated.

“It will be used if banks have a plentiful supply of foreign currency, which would lower the exchange rate and benefit importers. However, even though the official system is improving, since you launched the Franco-Valuta when there are some problems, the forex flow will be impacted,” he continued.

The head of Zemen Bank expressed his opinion, saying, “If authorities prefer to continue on the current decision, abundant resources should be available in the banking system. In my view, the government should continue to allow the Franco-Valuta for some basic commodities rather than opening it for everything.”

Bankers hinted that they discussed the matter with regulators at their meeting; nonetheless, the government is concentrating on liberalization, which is commendable; yet, certain liberties may have unintended consequences that would be prohibited if they interfere with the true goal.

They said, “We hope the right body will take up the matter; otherwise, the reform’s intended goal will be undermined by the parallel market’s continued ability to set the rate.”

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