ABEBE WOLDE GIORGIS
Keeping capital flight and money laundering in check is an important and burning issue in Ethiopia. This is due to the fact that the illegal transfer of money and capital flight are having a deleterious impact on economic growth and welfare, macroeconomic stability, and income distribution. Despite the extensive prevalence of the problem in Ethiopia, there is no country-specific study on its impact on economic growth and poverty reduction.
Given the lack of rigorous and exhaustive study in the country, the pervasive poverty situation which is deteriorated by the shortage of foreign exchange can be taken as the evidence of rising capital flight and money laundering.
Eyesuswork Zafu has a wealth of experience in Ethiopia’s financial sector. He is currently the head of the Hibret Insurance Corporation. He told The Ethiopian Herald that there are a lot of factors which push people to involve in illegal financial transactions. Among these, import over invoices has become a common practice.
“While writing a letter of credit to the National Bank of Ethiopia, importers try to acquire additional hard currency illegally through import over-invoicing,” he said.
This means the invoice is falsified to show that the price of goods being exported is lower than the actual price being paid by an importer abroad. In fact, trade misinvoicing is a reality impacting Ethiopia and every other country in the world.
For instance, Eyesuswork said, when writing a letter of credit to a bank, importers might create an invoice of three million USD while actually what they really demand is two million USD. “Hence, they will be able to deposit up to one million USD in a foreign bank. This is a huge capital loss for a country like Ethiopia whose economy always experiences a shortage of hard currency.”
Similarly, under-invoicing are also being used to conduct money laundering. Imports can be under-invoiced in order to evade customs duties or value-added tax. Further, as to Eyesuswork, currently, most second-hand cars that are excessively found in Addis Ababa were imported using under-invoicing. “Importers open a letter of credit of 50 dollars to import small second-hand vehicle but pay up to 1000 USD for the car through transferring the money illegally abroad.
To reduce the rate of capital flight and money laundering, it is very critical to encourage and incentivize fair business practices. Blaming a third party for every difficulty would not be a solution. Rather, the way out seems to be creating a fair business environment so that people do their businesses with confidence.
The shortage of hard currency frustrates investors and traders and forces them to look for shortcuts to gain wealth illegally exploiting the available loopholes. This could be their way out in the absence of fair business practice, the senior businessman said.
As to Eyesuswork, the key to reducing the shortage of hard currency is boosting export. For this to happen, there have to be mechanisms to reduce the dependency of the country’s export on few traditional products. “There has to be a lot of effort to diversify the export base. Further, it is also necessary to increase the volume of exportable commodities.”
The other mechanism to improve the shortage of hard currency is to encourage Ethiopians abroad to send a remittance using the legal route. Currently, more than 3 million Diasporas are living in Europe, USA, Australia and the likes and this is a huge asset.
The nation garners more than five billion dollars in the form of remittance annually. But still, a large segment of the Diaspora uses the informal channel in the black market to send money back home.
This is a huge obstacle for the country to gain additional capital in the form of hard currency. In this regard, the government has to start working to incentivize Ethiopians abroad to send money home using formal channels.
Countries such as India can be mentioned as a model in this regard. To encourage its citizens to send remittance through legal channels, the Indian government has come up with an incentive which is a 15 per cent increment on the exchange rate that is applied only to the foreign exchange sent home by its Diaspora.
Currently, the dollar to birr exchange rate in Ethiopia is 35 birr. Thus, to incentivize Ethiopians abroad, this rate could be increased by 15 per cent specifically targeting the Diaspora. “Otherwise, in the absence of incentives, the Diaspora might look into other alternatives to maximize their gains,” he emphasized.
As to Eyesuswork, side by side with garnering foreign currency, it is necessary to ensure whether the money is properly allocated or not. For this, he mentioned the case of the importation of artificial flowers which has become common these days. Ethiopian importers spend the hard-earned hard currency to import these products.
Paradoxically, flower/horticulture farms are flourishing throughout the country. These farms, in addition to meeting the local demand, have also been exporting their products to the international market. Hence,
it is meaningless to spend hard currency on the importation of flowers. There are also other luxury items imports which are not used by the majority and this has to stop.
The government also has to play its own role in boosting the public’s confidence. Vague business directives which create ambiguities need to be amended, he said. Recently the National Bank of Ethiopia announced that Diaspora Ethiopians have the right to have shares in banks and insurance companies in hard currency.
But later on, the bank changed its stance and announced that banks and insurances can only use 30 per cent of the hard currency to be deposited and the rest, which is 70 per cent, has to be deposited at NBE.
As to Eyesuswork, it should be understood that the hard currency gained this way is the shareholders’ money; it is not a profit or export earnings. Banks and insurances sell their goodwill to investors but the directives of the National Bank forces them to look for other options instead of encouraging them to have shares in banks and insurance. The shareholders need their money to run their businesses.
The government has taken various measures to control the hard currency in the black market but the expected outcome is still in vain. Asked whether other alternative mechanism can be deployed, Eyesuswork claimed that the unavailability of capital account and capital market are pushing people to go to the black market as alternative mechanism to get hard currency. This is an outcome of the government’s control of the exchange rate.
There are people who have a capital account in hard currency but they are prohibited from utilizing it. They are only allowed to use the currency deposit when they get a visa for foreign travel. Such situation erodes public confidence but if the restrictions are relaxed, the situation might improve and reduce hard currency shortage.
The current trade shows that after they get the foreign currency, instead of depositing it at the National Bank, exporters use it either to import other goods or transfer it another person residing abroad. Hence, the government has to introduce an open and exchange rate. In addition, the introduction of a capital market is equally important.
The Ethiopian Herald December 10/2020
