For Fitsum Alemayehu (MD), general manager of Biotech Plc, an importer of pharmaceuticals, the waiting for approval to open letters of credit is unusually long. It has been one year and three months since his company has been in queue at the state-owned Commercial Bank of Ethiopia (CBE).
"We're still waiting," grumbled Fitsum.
Operating in an industry that has been given the highest priority for accessing foreign currency, alongside fuel imports, the wait should not have been this long. It leaves pharmacies across the country with empty shelves, driving desperate patients to an underground market. Finding basic medicines is even worse during a pandemic when hospitals and health facilities are all working at full capacity.
Yet, Fitsum's complaints echo those from manufacturers and importers in pretty much all sectors in the economy, from day-to-day essential items to vehicles and from water bottling companies to agricultural input importers. There is no one left unaffected by the foreign exchange crunch, which the IMF said in recent months is enough only to pay for two months of imports.
Businesses appear to be up in arms about the effects of the excruciating shortage of foreign currency.
A country with less than four billion dollars in its foreign currency reserve last year, the gap between what it buys and sells shows an average of over 20pc of GDP. What Ethiopia offers to the world in goods and services can only cover 48pc of the 8.1 billion dollars it spent in 2019. According to the IMF's recent reports, this has further eroded over the first quarter of the current fiscal year; foreign exchange reserves had declined on import payments to 2.6 billion dollars.
The forex crunch has been looming over the economy for years now. Former Finance Minister Sufian Ahmed once famously said that he would not see the issue resolved in his lifetime.
In the past fiscal year, one of the sources of the country's foreign currency earnings, export of goods, stood at just over three billion dollars. In comparison, import bills were 13.8 billion dollars, although they declined by 8.1pc from the previous fiscal year.
A new set of policies from the central bank have added fuel to the fire.
The National Bank of Ethiopia (NBE) passed a directive last month; a set of new rules its officials hope will help them manage foreign retention and diaspora accounts. They believe with these administrative tools, they can address the forex crunch, drive foreign currency flow into the economy, and rein in dubious business activities that take advantage of the crunch.
The central bank orders that one-third of export earnings and inward remittance be surrendered to its coffers automatically. Just under half of the remaining 70pc, or 31.5pc of the total, is available for the exporter in a retention account while the balance remains with the respective bank. Diaspora account holders that receive inward remittance are also subject to the 30pc initial surrender. A new directive dictating the establishment and operation of diaspora accounts prohibits holders from importing non-essential items.
Officials from the Horticultural Exporters and Producers Association discussing with representatives of the central bank during an event organised by the Ethiopian Chamber of Commerce.
It is a significant alteration on the previous regime, where exporters were granted 30pc of the earnings in foreign currency while using the remaining 70pc to import essential goods within 28 days of the deposit date.
The amended directive for the retention and utilisation of export earnings and inward remittances is met with exporters' discontentment and as much dread from importers.
Much like many importers in the country, the past four years have not been an easy ride for Biotech Plc. A supplier of human and veterinary medications at its two stores, it has been forced to import at only one-fourth of its demand, compelling its management to contemplate shutting down the business, risking the livelihoods of its 20 employees. The company buys a portion of its pharmaceuticals from local manufacturers, while veterinary medications are all imported from abroad.
Biotech's annual need for foreign currency access does not reach one million dollars, a fraction of what Ethiopia spent at over three billion Birr to import medical-related goods last year, comprising 4.5pc of the total imports. The imports of medical and pharmaceutical products have seen an increase of 27pc from the previous year.
As a domestic private limited company, Biotech is not allowed to open a diaspora account. It is bound to access foreign currency through letters of credit from the commercial banks, which has made the situation worse. It has managed to receive a total of 110,00 dollars in a year, one-tenth of its requirements, with letters of credit opened by different private banks.
Biotech is one of the 500 medical and pharmaceutical supply companies registered in the country. Importers like Biotech are competing not only amongst themselves to access the foreign currency they need. They fight for an increasingly depleted resource against companies in multiple other sectors.
An import-export company that used to engage in seed export and importing plastics is close to abandoning its business. Its managers tried to survive, working with those who hold diaspora accounts. It was exporting primary commodities for whatever the items were worth, and importing stuff that offers such companies large enough margins to cover losses they suffer on the export side. Importing plastic products requires a large amount of foreign currency due to high shipping costs for large volumes, sometimes exceeding 300,000 dollars a month; a short-term remedy for staying afloat was importing simple laboratory technologies, which require less forex.
However, with the new directive in place, the tiny bit of hope they had has dried up.
"We're getting ready to shift to printing," the owner told Fortune.
The rationale behind the directives came about after a study the central bank conducted to assess what percentage of forex retained through export revenues is used by the exporters themselves. On average, 85pc of retention is used by exporters. In some cases, the central bank found out that as high as 99pc were used, some fully spend within the 28 days.
"If that is the case, then how will other manufacturers who need to import get foreign currency?" Fikadu Digafe, vice governor and chief economist at the central bank, bemused.
Optimum use of forex by exporter-importers was only one glitch in the system the central bank has identified. Export earnings are not available for sectors identified as high priorities. Officials at the central bank believe many exporters are engaged in illegitimate activities, spending their retained earnings on importing non-essential items. The exporters did so through offshore transactions that are not within reach of the central bank.
"The directive's intended purpose was not met," said Fikadu. "We have scarce resources; we have to act."
Diaspora account holders have been blamed for fuelling the parallel forex (black) market, which has a gap of an average of 10 Br for a dollar. Central bank officials attribute the sharp decline in remittances of one billion dollars last year - from 5.3 billion dollars reported the previous year - partly to funds being transferred away from the official channels. Consequently, it increases the prices of goods while the exporters themselves consume foreign currency that should have been allocated to other purposes, officials point out.
The underground market has proliferated due to the account holders' inability to earn in foreign currency. Still, since they want to engage in the import sector, they hoard foreign currency, cutting the volume of formal remittances by half, according to Fikdau.
The concept of diaspora accounts was initiated to encourage investment and savings. Yet, saving accounts are hardly ever opened, while 90pc of accounts opened are current accounts, which can be used to import items, and are one of the there forms of diaspora accounts, alongside fixed time deposit and non-repatriable Birr accounts.
"We can't import cars while factories are closed due to shortage of inputs," said Fikadu.
But for companies such as Biotech, diaspora accounts are short-term but crucial remedies to meet immediate needs in the pharmaceutical business. And the authorities are not helping the situation with their rather abrupt decision in changing the rules, according to Fitsum.
"The transition was sudden," he told Fortune. "A problem that has been accumulating for years shouldn't be expected to go away in a matter of days."
One of the sectors that claim to have been heavily affected by the new directives is the flower export industry, responsible for 14.1pc of forex earnings in the last fiscal year. Several flower exporters complain that the new retention earnings allocated to them are far below the amounts they require to import chemicals, fertiliser and packaging materials.
Roshanara Roses Plc is a flower farm located in the Oromia Regional State. It spends more than 31pc of the its earnings in foreign exchange to import these items. In its bid to lower foreign currency expenditure, the company has tried buying wrapping materials from local manufacturers. However, 20pc of the exported items were declined at their destinations, according to the manager.
The central bank does not concur with the idea that the new policies are undermining exporters, at least not at this early stage. Instead, they contend that it is more beneficial, notwithstanding exporters have three means of attaining foreign currency: their own earnings; letters of credit; and, working with diaspora account holders who are still allowed to import essential items.
Players in the flower export sector acknowledge the illicit activities that some exporters are engaged in but urge for a separate sectoral procedure that would allow them to use foreign currency earnings as they used to before. The central bank wants to wait until the new directive's outcomes are reassessed for considerations to be made upon its findings.
Experts see that the rationing of resources is always going to come with its problems. Hence, restructuring systems to increase foreign currency earning is crucial.
Encouraging foreign direct investments, cleaning up corrupt systems, and ensuring the country's overall stability should be the long-term solutions, according to Andualem Tilaye (PhD), a macroeconomist. He urges the authorities to consider incentives to exporters to increase their earnings and setting up a way for the diaspora to use formal remittance, which could be achieved by providing a higher exchange rate than ordinary transactions.
Exporters such as Biotech are, however, skeptical that they would benefit from the surplus of forex, as the issue extends far beyond availability. Insiders in the market agree that the allocation of foreign currency has its own problems and needs revision. Importers of priority items, despite their privileges, are still challenged.
"There is unfair competition," noted Fitsum.
Officials at the central bank appear to be aware that issues of misallocation may indeed exist. The National Bank of Ethiopia has passed a directive designed to ensure transparency in foreign currency allocation and foreign exchange management, obliging banks to allocate half of their reserves to importers of priority items. It dictates that the amount should be surrendered to the central bank if importers in the sectors designated as priorities do not claim it.
This is meant to fix the gaps in allocation observed in the enforcement of the revised directive, according to Habtamu Workineh, director of the External Economic Analysis & International Relations at the central bank.
"We receive complaints that banks are not registering petitioners," he said, indicating that the NBE has a strict monitoring mechanism by which it ensures registrants get the forex they requested fairly. "We're conducting a study to identify where things go wrong in the process."
An expert in the field is skeptical that the current rule meets its intended purpose.
"There is intense competition among banks to secure foreign currency," he told Fortune.
Banks are now in an unhealthy rush to build up their forex earnings, forcing them to compete for diaspora accounts and exporters who in turn bargain with them for preferential treatment either in terms of priority allocation or reduced interest rates in the lending market.
The former defeats the purpose of the new law entirely and the latter puts significant pressure on the earnings of banks. While the system gets sorted out, companies such as Biotech Plc remain on the verge of closing, risking years of investment and their employees' fate.
PUBLISHED ON Apr 10,2021 [ VOL 22 , NO 1093]
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