VZCZCXRO6796
RR RUEHROV
DE RUEHDS #0753 0771237
ZNR UUUUU ZZH
R 171237Z MAR 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 9965
INFO RUCNIAD/IGAD COLLECTIVE
UNCLAS ADDIS ABABA 000753
SIPDIS
SIPDIS
DEPT FOR EEB
E.O. 12958: N/A
TAGS: ECON ETRD EINV EFIN ET
SUBJECT: BLACK MARKET BUSTED - FOREIGN EXCHANGE CRACKDOWN
REF: ADDIS ABABA 411
1. SUMMARY: Following a period of rapid depreciation in the black
market exchange rate and a growing gap between official and parallel
rates, Ethiopian authorities have cracked down on the thriving but
illegal parallel foreign exchange market in Addis Ababa. END
SUMMARY.
2. Per reftel, the past few months have seen a dramatic departure
from typical patterns of exchange rate depreciation and black market
rates. Traditionally, the Birr, which is pegged to the US Dollar,
has been subject to a slowly creeping depreciation managed by the
National Bank of Ethiopia (NBE), Ethiopia's central bank.
Additionally, the historic gap between the official and black market
exchange rates has been insignificant. In recent months, a variety
of supply and demand factors in country (see reftel) as well as
world market trends have hastened depreciation and widened the
parallel/official gap.
3. Until this week, the black market in forex has operated mostly in
the open in small shops clustered in a few areas of Addis Ababa.
These shops often operate under the guise of other purposes, often
as liquor or music stores. The locations and business purpose of
the shops were not hidden in any significant sense, and transactions
took place readily over the counter. With the growing gap between
official and black market rates, shop operators felt the heat, which
led to wide fluctuations in the black market rate- from 10.5 birr
per USD one day down to 9.5 the next and back up to 10.6 last week.
4. On Thursday, March 13, Addis Ababa City Police and Ethiopian
Federal Police raided a reported 26 black market foreign exchange
shops. Thirty-five people were arrested and an undisclosed amount
(reportedly up to $6 million) was seized. Interestingly, the basket
of currency included not only the typical hard currencies of U.S.
Dollar, Euro, and British Pound, but others that indicate Ethiopia's
trading partners - the Chinese Yuan, Thai Baht, and Emirates
Dirham.
5. Linked with the raids, the Ministry of Trade and Industry revoked
the permits of merchants to import cement on a franco valuta basis,
stating that they believe the importers and the black market
currency exchanges are operating in tandem. Franco valuta allows
the import of products using foreign currency that has not been
officially allocated by the NBE. Franco valuta imports of cement
had been permitted earlier to alleviate the country's shortage which
was hampering ongoing construction efforts.
6. COMMENT: This crackdown on the black market is a first since the
current regime entered power in 1991 and is another indication of
the country's severe foreign exchange issues. As import demand
grows and world prices for key products such as petroleum, grain,
and fertilizer reach record levels, the Government of Ethiopia is
struggling to keep sufficient reserves to meet its obligations.
While export expansion is a way of increasing foreign exchange
reserves, Ethiopia's import demand is outstripping its export
earnings. This enforcement effort appears to be driven by a need for
more foreign currency to make its way into the official coffers of
the GoE. Post continues to monitor the exchange rate, both official
and parallel, and will report on any further developments. END
COMMENT.
YAMAMOTO