For Ethiopia-based businesses that require imported goods or materials, accessing hard currency through the banking system is one of the biggest challenges they face.
This article was written by Eline Bakker and Peter Feldman
In a series of posts, we will present the main challenges faced by Ethiopian businesses that are interested in expanding their range of WASH products and services. We will also highlight a set of recommended regulatory and policy actions to overcome these challenges. This first out of eight posts covers challenges related to access to foreign exchange.
According to the UNICEF/WHO Joint Monitoring Programme, only about seven percent of Ethiopians have access to basic sanitation services (JMP, 2019). Achieving universal access to basic WASH services in Ethiopia will require further development of the country’s private sector. The Government of Ethiopia recognizes the importance of the private sector in generating demand and creating access to materials and services for construction of improved latrines, and leads market-based sanitation efforts (FMoH, 2016). However, the scale of the challenge of providing access to adequate sanitation services to all is still relatively substantial compared to the amount and size of businesses currently offering such products and services. To gain more insights, the USAID Transform WASH team talked to more than twenty key informants in Ethiopia and the East Africa region to identify the main challenges facing the WASH market development in Ethiopia.
To learn more, follow this link to the full Learning Note.
Access to Foreign Exchange
To purchase a product for import into any country, the national currency must be converted to a “hard currency,” one that is accepted by a seller for purchase of the product, through the foreign exchange market. In Ethiopia, this might include purchase and import of finished goods, raw materials or equipment needed for local manufacturing. The country imports significantly more goods than it exports (US$ 15 billion in imports vs. US$ 2 billion in exports in 2018). This trade deficit, which has hovered around US$ 12-13 billion per year since 2014, has led to high demand for Forex (foreign exchange), which is in very short supply, exacerbated by below-market official exchange rates (World Bank, 2018).
The government allowed the Ethiopian birr to devalue by 15 percent in 2017, and it has continued to depreciate since then. Analysts predict that the currency will continue to undergo a “managed devaluation” to levels that are closer to a free floating market rate in an effort to encourage more foreign investment and address the country’s trade imbalance (World Bank, 2017). Devaluation of the birr requires purchasers of imports to use an ever-increasing amount of their national currency to obtain the same amount of Forex, effectively increasing the cost of all imports and decreasing the price of exports to international purchasers using hard currency.
For Ethiopia-based businesses that require imported goods or materials, accessing hard currency through the Ethiopian banking system is often identified as their biggest challenge as some sectors and businesses are prioritized over others. A contributor to the Ethiopian Business Review also expressed that “all transactions requiring foreign exchange are not created equal”,
Forex is tightly controlled within the banking system. A major portion of available Forex is earmarked for government infrastructure projects, such as the Grand Ethiopian Renaissance Dam and other national priorities. Thirty percent of Forex coming into commercial banks is transferred to the Central Bank of Ethiopia (CBE), which earmarks it for purchase of strategic materials, such as fossil fuels. The remaining Forex is then allocated to fulfill business requests in accordance with prioritization rules. Bank “allocation committees” are responsible for matching available Forex with submitted applications. Prioritization tends to follow a basic system:
- Priority allocations, including external debt repayments (closely monitored by CBE) and payment of foreign employees.
- Materials considered “essential imports”, such as fuel and pharmaceuticals, agriculture and certain manufacturing inputs, equipment and spare parts, profit and dividend transfers, nutritional foods for infants, and educational materials.
- Other “non-essential” requests (Lloyd and Teshome, 2018).
Forex requests from non-strategic businesses or for “non-essential” purposes, therefore, are queued and wait their turn for available funds. Businesses, including those offering WASH products, often wait many months to obtain the Forex that they have requested, and they may not have a clear idea when or how much will become available.
When businesses do receive an allocation, they may be required to use it quickly (i.e. within a 14-day window), and they may not receive the total amount requested. These Forex access challenges affect a business’s ability to respond to orders, expand operations, maintain positive business relationships (e.g. making payments on time) and remain competitive. Some businesses operate at a fraction of their production capacity due to Forex challenges.
The following actions are recommended to alleviate Forex-related obstacles to the success and growth of businesses that offer WASH products and services in Ethiopia:
- Review Forex operating guidelines and consider ways of making the application, queueing, and liquidation processes more accessible, accommodating and transparent.
- Encourage policy reforms that raise the priority of Forex access for socially oriented businesses in emerging markets, such as for WASH products.
- Advocate for WASH products to be added to the list of “essential or priority goods” so that Forex is more readily allocated to businesses importing or manufacturing WASH goods.