BY ABEBE WOLDE GIORGIS
Capital flight is a threatening phenomenon which affects the economy critically in Ethiopia. It harms economic growth and welfare, macroeconomic stability, and income distribution. Despite the huge capital flight problem in Ethiopia, there is no country-specific study on the impact of capital flight on economic growth and poverty reduction in the country. Due to the lack of rigorous and exhaustive study in the country, the pervasive economic malaise posed by the shortage of foreign exchange can be taken as evidence of rising capital flight.
Eyesus work Zafu is a senior citizen worked for various Insurance Corporations for more than five decades. As to him, there are a lot of factors which push people to be involved in illegal financial transactions and among others, over and under-invoicing for the importation of goods is a common practice in Ethiopia.
Importers open letters of credit at the national bank by over-invoicing to gain hard currency illegally. For example, when exporters want to import items worth two million dollars, they open a letter of credit to import worth three million dollars fraudulently. They deposit the balance of one million dollars in foreign banks as a result of which the nation loses a huge amount of capital.
Similarly, capital flights will take place under-invoicing. According to Eyesuswork, currently, most second-hand cars excessively found in Addis Ababa are imported by invoicing. Importers open the letter of credit only by purchasing 100 dollars to import small second-hand vehicles from countries but pay for the vehicle worth 1000 Dollars by channelling the money illegally abroad.
To control capital flight, encouraging people to do their business freely is vital. Accusing each other of 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 fraudulently. As the result, they take out-flowing capital as an option.
As to Alemayehu Geda, an Instructor at AAU in the Department of Economics, to tackle the shortage of hard currency boosting export is a tool and to that extent depending on traditional export items must be changed and diversifying and increasing the volume of the export commodities is essential. The other thing helpful to increase hard currency reserve is encouraging the diaspora to send remittances through formal channels.
He further said that currently, more than 3 million Diasporas are living in Europe, USA and Australia. The nation garners more than 5 billion Dollars in the form of remittances annually. But still, a large segment of the diaspora uses the informal channel which aggravates the black market and narrows the chance to gain capital. Hence to bring them into the formal channel encouraging and providing an 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 per cent additional money in the formal exchange rate to incentivize them.
Currently, in Ethiopia the exchange rate of one Dollar is 51 birr hence, to incentivize the diaspora community providing 15 per cent additional birr can boost the inflow of hard currency. When they do not get incentive money senders might look for other ways to gain up to 50 per cent in the black market.
As to Eyesuswork, side by side with garnering foreign currency, it is necessary to ensure whether the money is properly allocated or not.
Currently imported artificial flower is widely seen in various shops. Traders spend a significant amount of badly needed hard currency to import the flower. Paradoxically the size of flower farms is increasing. Farmers in addition to meeting the domestic demand export to foreign markets. Hence spending the meagre resource to import artificial flowers is meaningless. Other luxury items must be abandoned which are not used by ordinary citizens.
The government also has to play its role to boost public confidence. Vague instructions which create ambiguities should be improved or removed. 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 changed its stance and announced that banks and insurance only can use 30 per cent of hard currency and the rest 70 per cent should be deposited in National Bank of Ethiopia.
As to Eyesuswork, it should be understood that the hard currency is the shareholder’s money, it is not a profit or gained by export. Banks and insurances sell their goodwill to investors but the directive of the national bank makes them look other ways instead of attracting the diaspora. The shareholders need their money to run their businesses.
The government to halt the pervasive exchanging foreign currency in the black market has taken various measures but it is still in the vein to meet its objectives. Asked whether another alternate mechanism can be put in place, Eyesuswork said that, the unavailability of capital accounts and capital market is pushing people to utilize the black market as an alternative mechanism to get hard currency.
The government control of the exchange rate distances people from a formal way. Some people have a capital account in hard currency but they are inhibited to utilize it. They are only allowed to use money when they get a visa for foreign travel. Such a situation erodes public confidence but if the restriction is relaxed the situation might be changed and the scarcity of money can be mitigated.
Encouraging the inflow of foreign currency through various means is vital. But currently, exporters after they get the foreign currency instead of bringing the money to a national bank, import other goods or transfer the money to another person resided in abroad.
Again the person who received the money sent goods to them out of the bank system and such practices crippled the nation’s efforts to boost foreign currency reserves. Therefore, halting the practice of introducing an open and transparent exchange rate system is vital.
In addition, beginning a capital market is critically essential to alleviate the scarcity of currency. Recently the government announced that to alleviate the shortage of hard currency it is eying to invite foreign banks to operate here in Ethiopia for the first time and noticed that local banks are ready to compete with foreign banks.
However, some disagree with the government’s intention to invite foreign banks to come here and operate because the inefficiency of local banks in terms of technology, human resources and capital might be out weighted by foreign banks. Therefore the government should prolong the time of the coming of foreign banks.
Ethiopia still mainly exports agricultural un- processed products and due to the fluctuating trend of the price found itself in a disadvantageous position. In the world market, while the price of agricultural products particularly produced in developing countries is reduced contrary to this, the industrial products exported by rich countries are increasing.
In addition to these, due to climate change and global warming agricultural products mainly in developing countries are critically affected and the outputs are reduced which intern harms their chance to garner hard currency. Therefore, to overcome the problem in addition to mitigating global warming should enhance agricultural productivity by utilizing more inputs.
Currently, Ethiopia earns 3 billion Dollars annually from export and contrary to this, it imports 15 billion Dollar worth of goods which clearly shows how the nation suffers from a negative trade balance.
The Ethiopian Herald November 22/2022
