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By Ayele Gelan
Ethiopia is in a dramatic currency crisis situation in recent years. Prime Minister Abiy asked the Ethiopian diaspora to come to the rescue of his country by sending hard currency in his country. In this article, I will evaluate the gaps between actual and potential inflows, then explore options to boost remittances.
Figures
Data presented in Figure 1 are from the World Bank Migration and Remittances Database. Remittances amounted to only $ 345 million in 2010, but increased to $ 1,796 million in 2014 before dropping to $ 816 million in 2017, or about 45% of the peak. in 2014.
2014 It was the year when the protests of Oromo were lit in Ambo, spread to the rest of Oromia like a forest fire, and finally engulfed the entire nation when the resistance of Amhara did the same. An incessant campaign resulted in a boycott of remittances to punish the regime that desperately needed hard currency to maintain and stay in power.
In Figure 1, the solid line shows a graph of actual cash receipts. 2010 to 2014 tends to 2017, that is, what would have happened if the boycott of remittances had not occurred. The gaps between the solid and dotted lines indicate the amount of remittances that remained unrealized due to the boycott of remittances.
Cash flow would have reached US $ 2,496 million by 2017 if the situation remained normal. Ethiopia lost $ 765 million in 2015, $ 1,402 million in 2016 and $ 1,681 in 2017. Losses over the three-year period amount to $ 3,847 and Ethiopia has lost nearly 4 billion USD in remittances during this period.
Facts
There are discrepancies between figures and facts with respect to remittances in Ethiopia. The estimates of the World Bank seem to grossly underestimate the facts on the ground. I would like to quote two pieces of evidence.
First, in the World Bank database, remittance figures are closely related to the stock of migrants, that is, the total number of migrants who have been out for several years. The number of Ethiopian migrants living in most countries tends to be underestimated. It follows that remittances to Ethiopia from most countries are underestimated.
Take the case of Kuwait, a country whose situation I know very well. In the World Bank database, the number of Ethiopian migrants living and working in Kuwait and the amount of remittances in 2017 were US $ 3,917 and US $ 5 million, respectively. However, official statistics in Kuwait indicate that at least 74,000 Ethiopians live and work in Kuwait. If we apply migrant remittances in the World Bank estimates to this last figure, the amount of remittances from Kuwait would increase from US $ 5 million to US $ 94 million. The case of Kuwait could be rather extreme but certainly not isolated.
Second, as I pointed out in another article, remittances to Ethiopia tend to be underestimated for many other reasons. Significant gaps have always existed between the official and parallel stock markets of Ethiopia. For this reason, a substantial amount of remittances has been made through informal channels. In order to get better rates and avoid transfer fees, Ethiopians in the diaspora choose to carry hard currency with them, and then trade them directly for local underground markets. Alternatively, they usually send hard currency via friends or any traveler they trust. The World Bank estimated that 14% of Ethiopians whose money had been transferred from abroad in 2010 received it through travelers. The other dimension of the informal transfer is the case of strong currencies that remain abroad because of the more sophisticated black market operators that act much like money transfer services foreign.
Inventory
The figures and facts discussed in the previous sections can serve as an inventory exercise. The boycott of remittances could have had unfortunate consequences for the economy, but it has also provided the authorities with excellent ideas that diaspora communities have an extraordinary ability to quickly adjust remittances. depending on the circumstances. official channels. It was a negative shock, deliberately to hurt the regime at the time. PM Abiy's recent plea can be seen as a positive stimulus to inspire the diaspora community to come to the rescue of their homeland, relieving the nation of the ongoing currency crisis. Given the goodwill and positive image of Prime Minister Abiy among all Ethiopian sections, both at home and abroad, I have no doubt that the influx of Remittances would reverse very quickly and that the influx of currencies would move closer to its previous trend.
The speed with which this can happen will depend on how the monetary authorities proactively implement the right incentives. Authorities can learn at least two things about the boycott of remittances. First, there is a lesson on the behavior of the Ethiopian diaspora. If the diaspora reacted to a deterrent, it follows that it can also respond to the incentives as quickly and as resolutely.
Secondly, the authorities now have a sense of scale, quantifiable numbers to start planning for remittance goals. In response to the boycott of remittances, remittances have deviated from the trend, resulting in a cumulative deficit of about $ 4 billion. It is expected that a positive stimulus to the influx of remittances generates an additional $ 4 billion over the next three years, an additional influx of one million dollars. billion dollars a year. I note that these figures would significantly underestimate the underlying facts, as noted above.
In a 2010 World Bank survey, recipients used the money received in the following proportions: 57% daily expenses, 29%% small businesses, 4% savings and 1% of housing. It seems that this survey focused on the money transferred exclusively to be used by the relatives of the beneficiaries. However, members of the diaspora community transfer considerable funds for their own savings (eg domestic workers in the Middle East) as well as for investments (eg buying or building houses). Monetary authorities should undertake a more thorough and comprehensive study as part of a baseline badessment to inform the design of funds transfer policies.
Anomalies
Few high-level authorities like PM Abiy know that there are obstacles deliberately set up to impede the normal influx of remittances. Who created these strange obstacles and why remains unclear. It is essential that the authorities be aware of the existence of anomalies in Ethiopia's remittances entry system and undertake a thorough diagnosis with a view to their removal.
I would illustrate this by using the data presented in Table 1. a branch of the money transfer operator known as the Bahrain Exchange in Kuwait. As usual, the popular currencies and their daily exchange rates were shown in the two-column table, as shown in Table 1: a credit rate on a bank account and another cash withdrawal rate. In fact, the Ethiopian Birr was one of the popular currencies listed
I was shocked to learn that the rate for the Ethiopian Birr was one of the few on this board. In order to make this clearer in Table 1, I created a third column, "bank to cash (%)" by expressing the "bank account credit" as a percentage of the "cash pick-up". For most countries, this ratio is close to 100%, but for Ethiopia it is 74%.
Table 1. Anomaly of remittances from Ethiopia
CurrencyCredit to a bank accountCash Pick-UpBank spot (%)
Nakfa48 Eritrean. 3558.20100.32
Birr66.7289.8774.25 Ethiopian
Egyptian Pound58.5758.49100.14
Indian Rupee225.01224.52100.21
Bangladesh Takka275.64276.9199.54
Sri Lankan Rupee526.76527.1899.92 [19659032] Philippine Peso175.79176.3199.71
Nepalese Rupee359.71360.7999.70
Pakistani Rupee400.51
419.62
95.45
US Dollar3.303.29100.12
British Pound 2.502.5299.33
Source: Bahrain Stock Exchange in Kuwait (https://www.bec.com.kw/currency-exchange-rates?atype=money&continent=popular) Kuwaiti dinar money transfer rate (KWD) @ 22h43 Jul 17 2018 [19659023] This implies that the Ethiopian authorities have created a system that actively discriminates the transfer to bank accounts, the most convenient mechanism for transferring money! Currently, if a Kuwaiti dinar (KWD) is transferred to a bank account, only 68 birr arrives but if it is a care, then the beneficiary would receive 90 birr, a difference of 22 birr by KWD, I found this review -boggling, it defies the logic!
I was so confused with my meeting that I had to seek explanations from the staff. However, they could offer no help except to acknowledge that it was a weird thing indeed, adding that if I insisted on sending to a bank account, I could only do it if I did not. have an account at the Commercial Bank of Ethiopia. However, cash withdrawal services are available at all branches of many Ethiopian banks, including private banks. The disincentive created by the transfer to a bank account must have suffered incalculable damage on several levels.
First, exclude the most convenient currency transfer through official channels, thus aggravating the foreign exchange crisis in Ethiopia. At least 95 percent of those living in Kuwait are domestic workers, earning extremely low wages in the household sector. Their monthly earnings would range between 80 and 150 KWD per month (260 to 490 USD). The size of their income could be low but their savings rate is extremely high, at least around 75% of their monthly income! A simple calculation would establish that at least US $ 300 million would have been paid annually to Kuwait if the situation was right. This potential remains unrealized, at least not visible in official flows.
At this point, I am eager to add that the Ethiopian Embbadies in the Middle East, who are familiar with the situation, have often turned a blind eye to this appalling situation. Instead of helping hundreds of thousands of domestic workers to transfer their savings through formal channels, they often add a new layer of paperwork, encouraging them to come to the embbadies to open a bank account and
Foreign exchange earnings lost for the Ethiopian economy are nothing compared to the incalculable damages that have affected the lives and livelihoods of these domestic workers. The system literally forced them to use only one transfer option: the kidnapping of cash by a family member, relative or friend! More often than not, they end up losing their hard earned income because those who are in charge of the money will eventually spend it in part or in full.
Incentives
Authorities should aim to realize the full potential of remittances. This requires more ambitious and far-reaching measures than sending funds to stay-at-home parents. The most drastic measure would be to encourage foreign-currency diaspora savings accounts in the Ethiopian banking system.
a) Savings accounts in foreign currency. In fact, there is already a policy of diaspora saving in Ethiopia. However, it seems that this has never been taken seriously either by the authorities or by the diaspora community. To be honest, the banking practice used to serve it has proved exceptionally inferior to the norms.
Here is my anecdote. I opened a dollar account and deposited a certain amount, hoping that I would start a regular savings in this account. At the end of the transaction, I was waiting for a standard document to prove that I opened and held an account. However, it was said that they had not started issuing a savings book for a dollar account. I asked what proof would I have for my filing then. I was told that I could use the receipt that I received for the deposit. All this sounded like an archaic banking practice. I asked if I could talk to the director. The manager kindly agreed to discuss the matter with me, but at the end of the day he could not give a valid explanation. I was surprised by this whole thing. I have never bothered to reload this deposit account. Everything I deposited, I had to use it as fast as possible. The moral of this story is that a strong incentive system to attract hard currency would start with confidence-building measures that would include the modernization of banking practices.
(b) Competitive and attractive interest rates for hard currency savings accounts. This measure would encourage the diaspora community to choose to save more with Ethiopian national banks than anywhere else in the world. Fortunately, given the extremely low interest rates in most countries, only a marginal increase in interest rates would result in large currency inflows.
(c) Structuring interest rates according to access to funds. According to the usual banking practice, the interest rate economy depends on the frequency of withdrawals of funds. An immediate access savings account would attract relatively lower interest rates, although in the case of the Ethiopian diaspora account, even that must be reasonably high to attract more potential savers. However, savings accounts with fixed-term notice periods (for example, three months, six months or 12 months or more) should be available at higher rates. The existence of such longer-term options would create a considerable amount of hard currency funds in the Ethiopian banking system. For example, in the worst case, the Ethiopian diaspora community has transferred about one billion US dollars in 2017, mainly to support parents. If they can transfer as much to the support family, they can save at least as much for themselves. It's the potential to attract what's left in their foreign bank accounts, with at least a billion dollars being deposited annually into the Ethiopian banking system. The cumulative stock of hard currency in Ethiopia can increase very rapidly in a few years.
(d) Encourage investment. There have often been unrelenting campaigns to encourage the diaspora community to consider investment opportunities but, like all the rest, the calls were empty words and meaningless gestures that never happened. been taken seriously by all. This was partly due to mutual mistrust between the Ethiopian diaspora and the authorities. The campaign itself was more political than economic. Now that the situation is different, the fog of mutual mistrust seems to have disappeared and it is high time that the authorities engage seriously with the diaspora community and invite them to invest in their homeland. Perhaps this requires at least two sets of accompanying measures. Remove existing restrictions and exceptions with where the Ethiopian diaspora can invest. For example, currently, the financial sector is not open to the Ethiopian diaspora community. We must lift the prohibition of dual nationality, it is simply recognize the sense of belonging that is already in place.
(e) Recognition and Price. This is part of the incentive mechanism. For example, Bangladesh experienced a similar downward trend in remittances a few years ago. They immediately put in place measures to reverse the trend and with considerable success. Cash inflows increased by more than 35% in October 2017. In addition, they introduced a series of prices for individual remitters in different categories, as well as banks that implemented these policies, depending on the amount remittances that they attracted.
Two challenges would remain. First, the incentive to open dollar savings accounts would divert remittances from informal to formal channels to some extent. The reason is that the hard currency would remain deposited in Ethiopia and the depositor will have the opportunity to exchange it in local currency in the future at a better official rate. The insurance of these accumulated benefits as well as attractive interest rates should reduce the gap between what the shipper would get through the formal and informal channels. However, it is highly unlikely that such anticipated profits would drive the black market out of Ethiopia in hard currency. This is particularly the case given Ethiopia's very strong propensity to import goods and services from the rest of the world.
Second, paradoxically, successfully attracting remittances would inevitably force the BIRR to appreciate and hurt exports of goods and services. the gain generated by remittances would result in losses in the property markets. Incidentally, although this has not been much discussed in the past, it is these intrinsic conflicts that must have been the underlying causes of Ethiopia's recurrent devaluations over the last decade
. attracting remittances would inevitably pose a political dilemma. However, there is nothing beyond human effort. Extraordinary situations require extraordinary measures. For example, it is common for a country facing significant balance of payments difficulties to resort to a dual exchange rate mechanism for a certain period of time. This would involve adopting a floating or market-determined exchange rate in one market (remittances and capital inflows) and a fixed or indexed exchange rate regime on another market (for example, in market-based markets). import and export). This requires an innovative policy on the part of the Ethiopian monetary authorities
Awareness
In the past, there were propaganda and propaganda campaigns to engage with the diaspora community but with few 39; others. Now, it would be useful to change the sequence – put in place the right incentive structures and then engage in a huge publicity campaign to sensitize the diaspora community about the opportunities created. It is not necessary to approach the diaspora with a plea. What needs to be done, is to create conditions allowing the actions of the diaspora to simultaneously help their motherland and to help them themselves.
Incidentally, Prime Minister Abiy can bring back more than billions of dollars to the National Bank of Ethiopia. Middle East to do their job well facilitate the transfer of funds in the easiest way possible, lobbying the leaders of these countries so that they reach out to them. AS
ED Note: Ayele Gelan is an economist by training. He can be contacted at [email protected]. He tweets @AyeleGelan
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