BY WOSSENSEGED ASSEFA
The prices of foreign exchanges in the black market transactions have been changing at an increasing rate in the past few weeks. The USD for instance has been exchanged for Birr 73 while the rate of exchange determined by the National Bank was around Birr 44. However, after the consultation of the Ministry of Finance and the National Bank of Ethiopia, and a new (but temporary) directive that prohibits commercial banks from providing loans using company/private properties such as buildings, houses and others was issued, the price of foreign exchange has gone down.
Even though there has been a significant rise in the prices of foreign exchange in the past two-three years both in the regular and black markets, what we witnessed in the past two weeks (in the black market exchange rate) was alarming.
This particular article would later on presents the major possible reasons for the rise of the FOREX price, the rationale for the government to put forward a directive to prohibit loans and the possible outcomes of the directive. But before we jump to these, let’s have a scholastic view of what black market mean. According to Invesopedia, ‘black market is a transaction platform, whether physical or virtual, where goods or services are exchanged illegally. What makes the market “black” can either be the illegal nature of the goods and services themselves or the illegal nature of the transaction or both.
To clarify this further, while neither buying nor selling food is illegal, the transaction enters the black market when the good sold is illegal. And while it’s perfectly legal to sell a particular food item, when an all-cash restaurant does not remit to the state government the mandatory sales taxes on its transactions, it too has entered the black market’. In our particular case, the law prohibits the exchange of foreign exchange anywhere except within the licensed commercial banks and therefore even if exchange by itself is not illegal, the exchange held outside banks makes the transaction illegal.
When people want to exchange goods and services that are prohibited by the government, they go straight to black markets, which are also called shadow markets. Black markets also arise when people don’t want to pay taxes on the transaction for legal or illegal goods or services. Some black markets exist simply because people don’t realize there are laws they aren’t following, such as bartering and not reporting the taxable value of the transaction, or hiring a regular housekeeper or babysitter but failing to pay employment taxes. Transactions within the black market are not recorded and as a result business activities that take place in the black market will not be included in the GDP calculation.
There are a number of factors that lead to the creation and expansion of black markets. According to journals published on the issue of black markets, we shouldn’t conclude that all those who participate in black market have a tendency of avoiding taxes or committing a crime. There are driving forces leading to black markets. If we take for instance the issue of licensing of new businesses, the tougher the licensing restrictions on new businesses, the more entrepreneurs tend to engage in the activity of black market. In this regard, the ease-of-doing business in Ethiopia is not attractive. In fact, we as nation hold the rank of 159th from the world. Most local entrepreneurs and foreign investors find the bureaucratic procedures of licensing so hectic and this discourages start-ups on one hand and drives them to engage in black market on the other. Therefore, the more we ease the doing of business, the more we attract local and foreign investors and this in turn would raise the tax revenue for the government and also help in fighting bribes arising from the tough bureaucracy within the licensing offices.
Even though it is not that significant in Ethiopia and other Least Developed Countries (LDCs), black market arises due to trade-driven factors. Sometimes participants in black markets don’t want to act illegally, but because they lack the ability to work legally and need to make money, they don’t report their jobs or income to the government. Such situations arise when illegal immigrants obtain jobs, when students traveling abroad obtain employment without acquiring a work visa or when children work in violation of minimum age requirements.
In addition to these factors, black markets can also occur due to a government-imposed regulation on prices, i.e. price ceilings. Price ceiling is a type of price control, usually government-mandated, that sets the maximum amount a seller can charge for a good or service. Price ceiling are determined to favor consumers against the market price that unfairly favors sellers and suppliers. When price ceiling is determined by the government, sellers/suppliers would be dissatisfied and they try to limit the amount of their supply. And when supply is lower than the growing demand shortage occurs.
Suppliers/sellers tend to supply their produce/items in a black market where they could earn more profits since they sell their products at higher prices. This is among the major factors why people prefer the black market to exchange the foreign exchange on their hand. Most of the Ethiopian Diaspora sends its remittance to their relatives here via illegal ways to get more. This act denies commercial banks and the government of getting the necessary revenue and foreign exchange they would have received had the Diaspora send its foreign money through legal ways.
Illegal FOREX exchangers use various ways to deny the government of the FOREX earning. Of the several ways, the major one is that the Diaspora, rather than sending the FOREX directly to Ethiopia, it gives it to a person living in their locality whose informal business is Foreign exchange and that person retains the FOREX there and gives a call to his operatives here in Ethiopia to send money to a family that the Diaspora wants to in Ethiopian currency.
In this way, the FOREX doesn’t even steps a foot in Ethiopia. It would be retained at its very source and that accumulated retained FOREX would then be at the disposal of illegal traders and terrorist groups. Such a subtle way of foreign exchange has been highly prevalent during and after the TPLF era. The Ethiopian Diaspora needs to follow the proper legal means available to send their remittances to their family here. In doing so, the Diaspora can deny the terrorists and other illegal traders of their sources of FOREX on one hand and help it country get more FOREX and pursue its development goals.
The current rise in the price of FOREX in the black market is however different from and yet interlinked with the above mentioned driving factors. Many individuals and companies that have affiliations with TPLF regime during its era and after the law enforcement engagement began, they feared that things might turn out in their favor. Therefore it is expected from them to convert their assets and cash into a FOREX that they can use out of Ethiopia. Because at the end of the day they know that the people and the government would investigate their sources of wealth and bring them to justice.
However, it should be noted that it is not only the TPLF affiliates that engage in such activities. Normal civilians who speculate that things can get worse because of the continued war tend to grab any amount of FOREX they could get. Besides, since the value of the Ethiopian Birr is devaluating, anyone with an economic mind can think of exchanging their assets for a hard currency. Such an act, whether illegal or out of fear, negatively affects the economy and would bring a detrimental impact on the whole nation.
Therefore, the National Bank of Ethiopia’s issuing of a directive that suspends all lending by commercial banks using asset-based collateral has been proved to be the right call. Right after this directive is issued, the FOREX market (in the black market) has been stabilized. However, there should also be a mechanism that needs to be devised so that this directive won’t interrupt noble investment and business activities. If not handled in manner that identifies illegal actors from the sober ones, other economic activities might be hindered and would be unnecessary impacts.
Peace Be Upon Our Land!
The Ethiopian Herald August 19/2021
