Cablegate: Ten Birr: The Black Market Heralds the Currency

DE RUEHDS #0411/01 0500543
R 190543Z FEB 08




E.O. 12958: N/A

1. SUMMARY: In a shift from historic patterns, Ethiopia's currency,
the Birr, has been significantly depreciating recently against major
hard currencies including the U.S. Dollar in the black market.
Government of Ethiopia (GoE) officials attribute the depreciation to
shortages in supply and the ever increasing demand for these foreign
currencies. Following the depreciation of the Birr in the black
market, monetary authorities have also allowed a depreciation in the
inter-bank market from Birr 9.04/$1 to Birr 9.28/$1 in the same
period. The rate in the black market shops are quote driven --
having now reached 9.9 Birr/$1 -- reflecting largely demand and
supply conditions.


2. Like most countries, Ethiopia's foreign exchange market has dual
components -- the official inter-bank market and the black market.
The inter-bank market is managed by the National Bank of Ethiopia
(NBE) as it deems necessary to smooth excess volatility in the
market. Traditionally, the official rate of the Birr against the
U.S. dollar maintained a steady crawl of approximately 0.0001 Birr
per day, and the premium between the official and black market rate
was not significant. An exception was in the aftermath of the 2005
election when a substantial swing was triggered by speculation. At
that time, the GoE took administrative measures such as requiring
the forfeiture of foreign currency notes from passengers at the
airport to ameliorate the pressure on the black market Birr/$
exchange rate and bring it back in line with the official one.

3. In contrast with the past, the Birr in the black market has been
depreciating significantly against major hard currencies such as the
U.S. Dollar, Euro, and Pound Sterling owing to shortages in their
supply and the ever increasing demand for these foreign currencies.
The Birr/$ rate in the black market has been depreciating markedly
from Birr 9.50/$ at the beginning of December to Birr 9.90/$ in
beginning February 2008, indicating a record of 4.2 percent
depreciation in just three months. Following this, the monetary
authorities allowed a sizable depreciation in the inter-bank rate
from Birr 9.04/$ to Birr 9.28/$ over the same period.


4. A preliminary study conducted by the NBE indicates that the
reasons for the recent surge in the black market rate are both
supply and demand side factors. On the supply side, sources of
foreign currency in the black market are border trade with Sudan and
Somalia and informal remittances through friends, relatives and
businessmen mainly from the U.S., Europe and the Middle East. NBE's
assessment indicated that the currency of the border trade with
Sudan changed to Euros instead of dollars due to U.S. sanctions, and
border trade with Somalia is curtailed by tensions in the region.
Thus, there is a decline in the supply of foreign currency notes
into the market.

5. On the demand side there is an increasing demand for foreign
exchange for several reasons: (1) to finance franco valuta imports
(official imports that have not been allocated foreign exchange by
banks) such as importing cement for the booming construction sector,
(2) to finance contraband imports, for which payment is required in
hard currency, (3) under invoicing imports mainly from India and
China, and (4) for speculative purposes to hedge against the rising
inflation and exchange rate depreciations either by hoarding locally
in foreign currency or saving abroad. Macroeconomic indicators such
as the 18 percent annual CPI inflation, the negative 14 percent real
interest rate on savings, and the absence of alternative investment
opportunities like securities markets erode people's confidence to
save in local currency and hence prompt the hoarding offoreign

6. A senior economist at the NBE, who wishes to be anonymous,
estimated the total annual remittance inflow to Ethiopia in the
range of $1.5 to $2.0 billion. Close to $600 million is transferred
through the official channels while the balance comes through
informal ways. This suggests the number and volume of transactions
held by the black market operators is significant. The number of
black market shops in Addis Ababa that buy and sell foreign
currencies has increased significantly in the past few years.
Post's Economic Specialist observed some shops busy exchanging
currencies in large volumes and large numbers of transactions.
Despite the increase in the number of these illegal shops,
particularly in Addis Ababa, the GoE is not taking measures to
control the black market. This leads some people to assume that the
GoE uses this market to tap the informal inflows and increase its
supply of foreign exchange.

7. The exchange rate in the black market is determined by demand
for, and supply of, foreign currencies. A person working in a black
market shop, located near Ethiopia Hotel in Addis Ababa, told Post's
Economic Specialist that the rate in the black market shops are
largely determined by the volume and number of orders placed by

ADDIS ABAB 00000411 002 OF 002

8. COMMENT: Adjustments in an exchange rate reflect performance of
an economy. Ethiopia's export receipts fall far short off financing
the country's huge import bill. The country largely depends on
foreign assistance and other inflows to finance its hunger for fuel,
capital goods, food, and other imports. The increase in the size of
the black market and the heightened depreciation of the Birr versus
the dollar may signal a wariness among the public regarding
Ethiopia's future economic stability. The pressure on the
depreciation of the local currency risks continuing unless
government is committed to move forward in liberalizing the economy,
enhance private sector investment and attract more foreign direct
investment. END COMMENT


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