Why Ethiopia should tackle the looming capital flight on time

Reading Time: 5 minutes

 BY ABEBE WOLDEGIORGIS

 Capital flight is a threatening phenomenon which affects the 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 country specific study on the impact of capital flight on economic growth and poverty reduction. 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.

Eyesuswork Zafu is a senior citizen who has worked for various Insurance Corporations for more than six decades and as to him, there are lots of people involved in illegal financial transaction activities and among others, over and under invoicing for the importation of goods. When importers to gain hard currency illegally, they open letter of credit at national bank by over invoicing. For example, when exporters want to import items worth of two million dollars they open letter of credit to import worth of three million dollars disguisedly and deposit the balance of one million dollar in foreign banks. This way the nation loses huge amount of capital.

Similarly capital flight will take place by under invoicing. According to Eyesuswork, 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 vehicles from Arab 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 forced them to gain wealth in short cut way as the result, they take out flowing capital as an option.

As to Professor Alemayehu Geda, to tackle 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 helpful mechanism to increase hard currency reserve is encouraging diaspora to send remittance through formal channel.

As to Alemayehu, currently more than three million Diasporas are living in Europe, USA and Australia. The nation garners more than five billion Dollars in the form of remittance annually. But still large segment of the diaspora uses the informal channel which aggravates black market which narrows the chance to gain capital. Hence to bring them in to the formal channel encouraging and providing incentive is essential, said Alemayehu.

 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% additional money in the formal exchange rate to incentivize them. Currently in Ethiopia the exchange rate of one Dollar is 54 birr hence, to incentivize the diaspora community providing 15% 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% in 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 looking artificial imported flower in various shops is common. Traders spent significant amount of hard currency to import the flower. Paradoxically the size of the flower farms in Ethiopia is increasing. Farmers in addition to meet 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 government also has to play its own 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 hold shares in banks and insurance companies in hard currency but later changed its stance and announced that banks and insurances only can use 30 percent of hard currency and the rest 70% should be deposited in National Bank of Ethiopia.

As to Eyesuswork, 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 goodwill to investors but the directives of the national bank entice the diaspora to look for other means instead of attracting them. The shareholders need their money to run their businesses.

 The government to halt the pervasive exchanging of foreign currency in black market has taken various measures but halting it is still in vein. Asked whether other alternative mechanism can be deployed, Eyesuswork said that, the non-availability of capital account and capital market is pushing people to utilize black market as alternative mechanism to get hard currency. The governments control on exchange rate distances people from formal way. There are people who have capital account in hard currency but they are inhibited to utilize it. They are only allowed to use money when they get visa for foreign travel. Such situation erodes public confidence but if the restrictions are relaxed, the situation might be changed and the scarcity of money can be mitigated. In addition, encouraging the inflow of foreign currency is vital.

 But currently what exporters are doing is they import other goods using the foreign currency they obtain through the export or transfer it to other person resided in abroad instead of bringing the money to national bank. Again the person who received the money provides them out of the bank system and such practices crippled the nation’s efforts to boost foreign currency reserves.

Therefore, to halt the practice introducing open and transparent exchange rate system is vital. In addition, beginning capital market is critically essential to alleviate scarcity of currency. Recently the government announced that in order to alleviate 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 to be ready to compete with foreign banks. However, some disagree on 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 unprocessed products and due to the fluctuating trend of price found itself in a disadvantageous position. In the world market while the price of agricultural products particularly produced in developing countries is reduced, the industrial products exported by rich countries are increasing.

 In addition to these, due to climate change and global warming agricultural products mainly in the developing countries, critically affected and the out puts are reduced which in turn harms their chance to garner hard currency. Therefore, to overcome the problem in line with mitigating global warming should enhance agricultural productivity through utilizing more inputs.

Currently Ethiopia earns three billion Dollars annually from export and paradoxically, it imports 15 billion Dollar worth of goods which clearly shows how the nation suffers from negative trade balance. This again shows that the Ethiopian economy is import dependent which makes the nations efforts to tackle poverty very difficult. The country’s mainstay of the economy is a rain fed, subsistence and climate sensitive agriculture. Unless the situation is changed to the better, the endeavor for enhancing foreign currency garnering and poverty reduction is doomed to fail.

The government aspired to attain structural change by fostering the industry sector to play a leading role in the economy and to that end, the expansion of manufacturing is undergoing but the sector needs better technology and spare parts vital for production activities and yet needs hard currency. Therefore, broadening the nation’s means of garnering currency should be strengthened.

 THE ETHIOPIAN HERALD WEDNESDAY 24 MAY 2023

Recommended For You