Finance expert urges ‘holistic approach’ to curtail thriving currency exchange in parallel market
By Yared Nigussie
A financial expert urged the government to implement a holistic approach to control the thriving foreign exchange in the parallel market.
Reports claim that the gap between Ethiopian currency’s official and parallel-market exchange rates widened. The Birr traded as high as 116 a dollar on the parallel market (commonly known as black market), while the official rate remained at 52.5 Birr.
“One fits all way will not be the solution to solve the problem,” Sewale Abate (PhD), Finance and Investment Expert, told Origins Business.
Usually the foreign currency exchange rate will be set by floating exchange rate, which relies on the foreign currency market based on supply and demand relative to other currencies. But Ethiopia’s case is unique—it has been decided so far by the rate of the National Bank of Ethiopia (NBE).
“NBE’s decision to take 70% of the foreign currency generated by local banks caused a reduction of the supply-side of foreign currency in the market,” Sewale said. “Whenever the supply of foreign currency declines it’s obvious that the demand for it will increase,” he said.
The finance expert listed out a set of reasons attributed to thriving parallel market exchange in the market.
“Firstly, people who need foreign currency (mostly US Dollar) for scholarships, medical and other purposes are forced to prefer the informal market due to the shortage in the formal sector,” as he puts it. “The informal sector will increase its profit margin as demand balloons.”
The economy generates foreign currency from exports, remittances, and exchanges from foreign nationals, among others. Local banks get only 30% of this amount— a factor that worsen the currency crunch, he said.
“Secondly, vehicle market places are mushrooming in Addis Abeba. These markets are eager to secure foreign currency to import cars, and they prefer the parallel market to collect foreign currency,” said Sewale. At the same time vehicles price is increasing alarmingly due to the soaring dollar price in the parallel market.
Suzuki Dzire automobile, which previously sold for 1 million Birr has now reached 2.3 to 2.4 million Birr, a rate registered over 100% increment and this factor as well, is emanated from the foreign currency widening gap in the market, as Sewale puts it.
“We’re also experiencing a soaring inflation in our life partly because of the exchange rates widening gap,” he said.
Not only the informal sector but also the formal sector has its own glitches in a view of Sewale.
“Reports claim that anyone has to pay to get a foreign currency though opening Letter of Credit (LC) in banks,” he said, adding that, “Management teams in the formal sector has their own slice in worsening the problem.”
“If you are an importer and need to get $100,000, you have to pay the difference of the formal and informal exchange amount—which is a bribe by itself,” he further explained. “Both formal and informal sectors have their own share in worsening the problem.”
He recommends a genuine (practical) import-substitution strategy to be implemented by the government and increasing export commodities to garner more foreign exchange as way outs.
“The foreign currency generated by the market should be left for the market,” he further recommends. “The government should revise the 70-30% exchange rate rule along with altering the exchange rate to the market system”.
Dr. Sewale hopes that when foreign financial institutions start working in Ethiopia, the foreign currency exchange rate will be market-led. He believes that the society should prefer to conduct exchanges in the formal market because the informal market exacerbates current inflation.
Mainly, the law enforcement authorities should take a viable and systematic measure instead of intermittent campaigns, he explained. He further sees increasing the foreign currency deposit of the country through plans and policy instruments as a solution, which will have in turn a role in stabilizing the inflation.