Capital flight is a threatening phenomenon which affects Ethiopia’s economy critically. It has a negative impact on economic growth and welfare; macroeconomic stability; and income distribution. Despite the huge capital flight problem in Ethiopia, there is no specific study on the impact of the practice on the economic growth and poverty reduction in the country. Due to lack of rigorous and exhaustive study in the country, the pervasive poverty posed by shortage of foreign exchange can be taken as the evidence of rising capital flight.
Zafu Eyesuswork Zafu is a Chairperson, Board of Directors of Hibret Bank and has worked for various Insurance Corporations for more than five decades. As to him, there are a lot of factors which push people to involve in illegal financial transaction activities and among others over and under invoicing for the importation of goods is a common practice in Ethiopia. When importers to gain hard currency illegally, they open letter of credit at National Bank by over invoicing.
For example, when importers want to import items worth of two million Dollar, they open letter of credit to import worth of three million Dollar disguisedly and deposit the balance of one million dollar in foreign banks in such a way the nation loses huge amount of capital.
Similarly, capital flight will take place by under invoicing. According to Zafu, currently, most second hand cars excessively found in Addis Ababa are imported by the under invoicing. Importers open the letter of credit only by purchasing 100 dollar to import small second hand vehicle from countries but pay for the vehicle worth of 1000 Dollars through channeling the money illegally to abroad.
To control capital flight, encouraging people to do their business freely is vital. Accusing each other for such misdeeds is not a solution. Creating enabling environment to do business confidently and ensuring justice is essential. The shortage of hard currency frustrates investors and traders and forces them to gain wealth in short cut way. As a result, they take out flowing capital as an option.
Professor Alemayehu Geda is an economist and a lecturer at AAU. On his part, he said that to tackle shortage of hard currency, boosting export is a main tool and to this end, depending on traditional export items must be changed and diversifying the kind and increasing the volume of the export commodities is essential. The other thing helpful to increase hard currency reserve is encouraging diaspora to send remittance through formal channel.
Alemayehu further said that currently, it is believed that more than three million Diasporas are living in Europe, USA and Australia and other countries. This is not an easy asset. The nation garners more than five billion Dollar in the form of remittance annually. But still large segment of the diaspora uses the informal channel which aggravates the black market that narrows the chance to gain capital. Hence, to bring them in to the formal channel, encouraging and providing incentive is essential.
Countries such as Malaysia can be mentioned as the case in point in this regard. When citizens send hard currency from abroad, it gives 15 percent additional money in the formal exchange rate to incentivize them.
Currently, in Ethiopia the exchange rate of one Dollar is around 70 Birr. Hence, to incentivize the diaspora community providing 15 percent additional Birr can boost the inflow of hard currency. When they do not get incentive, money senders might look other ways to gain up to 50 percent in the black market.
As to Zafu, side by side with garnering foreign currency, it is necessary to ensure whether the money is properly allocated or not.
Of late, looking artificial flower imported in various shops is common. Traders spend significant amount of badly needed hard currency to import the flower. Paradoxically, the size of the flower farms in Ethiopia is increasing. Farmers, in addition to meeting the domestic demand, they export to foreign markets. Hence, spending the meager resource to import artificial flower is meaningless. There are also other luxury items that must be abandoned which are not used by the ordinary citizens.
The National Bank of Ethiopia also has to play its own role to boost public confidence. Vague instructions which create ambiguities should be improved or revoked.
Recently, the National Bank of Ethiopia (NBE) announced that diaspora Ethiopians have the right to have shares in banks and insurance companies in hard currency but later changed its stance and announced that banks and insurances can use only 30 percent of hard currency and the rest 70 percent should be deposited in NBE.
As to Zafu, it should be understood that the hard currency is the shareholders money; it is not a profit or gained by export. Banks and insurances sell their good will to investors but sometimes the instruction of the NBE instead of attracting diaspora; makes them to look other ways. It should be recognized that shareholders need their money to run their businesses in simplest way.
The government, to halt the pervasive black market, has taken various measures but it is still not controlled fully. Asked whether other alternate mechanisms can be deployed, Zafu said that the none availability of capital account and capital market pushes people to utilize black market as an alternative mechanism to get hard currency. The government control on exchange rate shoves off people from the formal way. There are people who have capital account in hard currency but they are inhibited to utilize as they need it. They are only allowed to use money when they get visa for foreign travel. Such situation erodes public confidence but if the restriction is relaxed, the situation might be changed and the scarcity of the money can be mitigated.
Encouraging the inflow of foreign currency is vital. But, currently, the exporters import other goods or transfer the money to other person resided in abroad after they get the foreign currency instead of bringing the money to National Bank. Again, the person who received the money provides them out of the bank system and such practice cripples the nation’s efforts to boost foreign currency reserves.
Therefore, to halt this illicit practice, introducing open and transparent exchange rate system is essential. In addition, introducing capital market is critically important to alleviate scarcity of the hard currency.
Recently, Prime Minister Abiy Ahmed announced that in order to alleviate shortage of hard currency, the government is eying to invite foreign banks to operate here in Ethiopia for the first time in the nation’s recent history and advised that local banks to be ready to compete with foreign banks.
However, some disagree with the intention of government to invite foreign banks to come here and operate because the inefficiency of local banks in terms of technology, human resources and capital deficit might risk them to be beaten off-track by foreign banks. Therefore, the government should extend the operational time of the foreign banks.
Ethiopia still exports mainly agricultural and none or semi processed products and this may put it in a disadvantageous position due to the fluctuating trend of price in the international market. In the world market, while the price of agricultural products particularly, of the developing countries is reducing; the price of industrial products exported by rich countries, on the contrary, is increasing.
In addition, due to climate change and global warming, agricultural products mainly in the developing countries are critically affected and the out puts are reduced which in turn harm their chance to garner hard currency. Therefore, to overcome the problem, the government, in addition to mitigating global warming, should enhance agricultural productivity through utilizing more inputs.
Currently, Ethiopia earns about three billion Dollar annually from export and in contrary to this, it imports goods worth more than 15 billion Dollar which clearly shows how the nation suffers from negative trade balance, it was learned.
BY ABEBE WOLDEGIORGIS
The Ethiopian herald may 12/2022
