Dire-Dawa Free Trade Zone, contraband, Franco-Valuta, are said to attribute to the widening gap

Expansion and low control of contraband, Franco-Valuta scheme and the opening of Dire-Dawa Free Trade Zone are said to attribute to the widening gap between the Ethiopian currency’s official exchange rate and the parallel-market.
Experts opine that the high escalation of the parallel exchange will face a sharp decline as government starts to crack the whip on the matter.
It is widely thought that the surging inflation and a shortage of hard currency in Ethiopia are driving up the price of the US dollar on the black market, to which most experts agree.
One of the economists that Capital reached out to explained that after the launching of Dire-Dawa Free Trade Zone, investors were trying to get hold of foreign currency in order to inject investments to the free trade zone which has a duty free scheme. “Investors are misunderstanding the free trade concept,” said the economist, who wanted anonymity.
“Everyone thought we had completed building the infrastructure for the free trade zone. IPDC is still on process to complete necessary documents including legal framework and customs regulation works to administer Dire-Dawa FTZ,” said Sandokan Debebe, CEO of IPDC, the owner of the free trade zone.
“Despite receiving numerous applications, we still haven’t chosen companies for the investments,” emphasized the CEO.
On similar lines, experts also suggest that despite Franco-Valuta privileges being applied with the aim of stabilizing the market; it has not performed as expected. The Ministry of Trade and Regional Integration also stressed that Franco-Valuta has not reeled in the success as expected and has further not been able to stabilize the soaring inflation.
“As the scheme lacks control over verifying importers’ source of foreign currency; it allows importers to capitalize on the black market creating demand. That is why the Franco Valuta scheme has zero contribution in stabilizing the market,” one expert explained.
Experts claim that finished products are flowing into the country disguised as raw materials taking advantage of the duty free scheme under the cover of investment. Experts also argued that illegal importers are using the changed harmonized code to import materials especially finished materials having bought forex from the parallel market.
“The import customs duty is almost minimal when importing raw materials, which is far from the case for finished goods. Thus, illegal importers are using improper documents to steal from customs duties,” experts explained, adding, “This further affects the local industry besides bypassing the government import levy.”
“Data may show that the volume of raw material import is very high since the harmonized code document shows it is the import of input for manufacturing industries, but in actual sense the commodities are finished and directly channeled to the market,” the experts pin-pointed on how swift the crooks act.
“Foreign currency allocation goes for finished materials, contrabandists, and for those who abused the privilege the country facilitates, such acts creates false narrative on the sector development and expands the tax evasion,” they underlined.
In recent weeks, due to the increased demand for foreign currencies, the dollar exchange rate at the parallel market skyrocketed making the official and parallel markets to drift exponentially apart.
In some parts of the city where black market trading takes place, during the week, one US Dollar was selling between 93 to 95 birr.
“It is not something that can be stopped by controlling mechanism,” said Fikadu Digafe, vice governor of National Bank of Ethiopia indicating that there is also a gap between demand and supply.
The foreign exchange provided by the banks is decreasing significantly. In response to excess demand for foreign exchange in the official market, parallel markets for foreign exchange have gained traction. However, the emergence and existence of active parallel foreign exchange market creates several complications to policy makers in their attempt to regulate the external balance.
“We are working to stabilize the situation. NBE is doing an assessment to figure out what the real reason is,” said the vice governor, adding, “It all has to start from knowing the reason.”
Economists are now calling on the government to be alert and stringent in mitigating this alarming issue.

Minimum paid up capital set to 500 million birr

The National Bank of Ethiopia’s decision to increase the minimum paid up capital of the insurance industry to half a billion birr has received mixed greetings by sector pundits.
As per the decision of NBE under the ‘minimum paid up capital for insurance company directive no. SIB/57/2022’ the minimum paid up capital has expanded by 567 percent to 500 million birr for both general and long term insurance businesses.
The minimum paid up capital of insurance companies as per the 2013 directive no SIB/34/2013 was 75 million birr (60 million birr for general insurance and 15 million birr for long term insurance) for both businesses.
As per the new directive which was issued on September 23 after becoming effective from September 15, following the signage of Yinager Dessie, Governor of NBE, indicated that the minimum paid up capital for general insurance will be 400 million birr and 100 million birr for long term (life) insurance business operations. The percentage for both has climbed by 566.6 percent compared with the 2013 directive.
Existing insurers are expected to fill the stated minimum capital by June 30, 2027, while those under formation are expected to reach the amount in seven years after the commencement of their operation.
Article 5.2 of the new directive stated that an insurance company in the process of share subscription, which succeeds to collect a minimum paid up capital of 60 million birr for general insurance business or 15 million birr for long terms insurance business or 75 million birr for general and long term insurance businesses from founding shareholders, holds subscribers meeting and submits final application to the NBE within a maximum of one year after the effective date of this directive shall be permitted to get an insurance business license with a minimum paid up capital of 60 million birr for general insurance or 15 million birr for long term insurance or 75 million birr for both, “however such an insurance company shall be required to comply with the new minimum paid up capital amount within seven years after the commencement of the insurance business.”
Insurers are also expected to submit their action plan as to how the required paid up capital shall be fulfilled.
The new decision of the regulatory body has now been viewed by experts in different angles.
On one side, the new amount is said to be exaggerated and unrealistic to which insurers will find it hard to fulfill the target over the short stipulated period, opine some experts. On the flip side, other experts opine that the 500 million birr is very small compared to the economy of the country, to which insurers shall achieve the minimum rate easily.
One of the experts that Capital approached for comments on the issue criticized the decision, stating that NBE’s move was not considering the reality on the ground.
He said that some pioneer insurers that have been operational for the past close to three decades have very low capital amounts compared with the new NBE rate.
“For over 20 years, these insurance companies were not unable to pass 200 million birr in paid up capital. So how can we project them to attain the new minimum rate in the coming five years’ time,” Ebsa Mohammed, General Manager of Alfa Certification Consultancy, who is one of the experts who criticizes the latest move by NBE, argued his point.
He further explained that in the very least the Central Bank should have hinted the insurers like it did the bankers, before the revision of the former directive.
“Before revising the banking sector’s minimum capital rate, the Central Bank frequently stated that banks should increase their capital; after which it changed the directive. However, for the insurance industry the move has been sudden,” he illustrated.
He said that more than half of the 17 private insurers, which make up the majority of the operations have been running for two decades now at a capital lower than that of 500 million birr, “So as per past experience and trend it will be difficult for them to attain the new rate within a very short period.”
Experts also accepted that there are some stand-out insurers who have already reached the new minimum capital rate.
“However, the value of the birr will be incomparable. Nonetheless, these top notch insurers achievement in attaining such capital remains impressive but it is also passive,” Ebsa said.
He and others who share Ebsa’s view argue that the number of new entrants set to penetrate the industry shall significantly drop.
“The sector is not attractive for potential investors and when these kind of new challenges happen it will further constrict others who are working to form new insurance companies,” the experts said, underling, “The insurance business is not like the banking service.”
They said that as a result, we may in the foreseeable future see instances where insurers are faced with mergers.
With a view of the other side of the coin, Ebsa supported the NBE move citing that this will allow the public to see the strong business actor in the insurance industry.
“In the future they have to design and follow a modern business model and be ready for the upcoming competition since the market will be open to the global competitors,” Ebsa, a consultant on the insurance business remarked.
Unlike Ebsa and co’s opinion some other experts support the NBE directive. Some of them say the amount is not big when compared to the country’s economy and the level of potential reach of the insurance industry.
For instance, Assegid Gebremedhin, CEO of At Insurance Broker and Consultant, said that the new decision is basic for the insurance industry since one of the major measurement for competition is companies’ capital.
“One of the measurements of the insurance sector growth and their strength is the increment of their capital,” he says, adding, “The GDP is growing that means domestic service is also growing. So the capital of the insurance companies has to reach on the level that shall support the growth of the economy. Due to that, the capital increment is a must for the sector.”
“The government annual budget has reached 765 billion and similarly the economic transaction is at 1.4 trillion birr; so financial firms should have from one to five percent of the budget as capital, but their current aggregate capital of the insurance industry has not reached 20 billion birr,” he added.
“The global and African trend shows that insurance companies’ capital is increasing regularly. In our case the sector is not growing because there is no way for growth, but our perspective towards capital is not shaped properly,” he added.
He argued that there is a potential to reach the minimum paid capital rate. One of the ways to increase the capital is floating more shares for the general public. Insurers have to include additional shareholders to the poll.
“Unlike the banking industry, most of the old insurers have very small shareholders. Why should they not work towards having thousands of shareholders?” he rhetorically remarked.
Experts claimed that one of the reasons for the sector’s slow growth was because of the small amount of capital. The insurance penetration in Ethiopia is less than one percent of the GDP, which is very low compared with peer countries.
Asseged said that the economy is joining the capital market which means that they can have short term investments that may also increase their capital and income.
He re-affirmed his stance on the matter by stating that the new comers to the industry will attain the set capital amount easily.