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Viewing cable 08ADDISABABA411, TEN BIRR: THE BLACK MARKET HERALDS THE CURRENCY

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Reference ID Created Released Classification Origin
08ADDISABABA411 2008-02-19 05:43 2011-08-25 00:00 UNCLASSIFIED Embassy Addis Ababa
VZCZCXRO0929
RR RUEHROV
DE RUEHDS #0411/01 0500543
ZNR UUUUU ZZH
R 190543Z FEB 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 9601
INFO RUCNIAD/IGAD COLLECTIVE
UNCLAS SECTION 01 OF 02 ADDIS ABABA 000411 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV EAGR ET
SUBJECT: TEN BIRR: THE BLACK MARKET HERALDS THE CURRENCY 
DEVALUATION 
 
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. 
 
BACKGROUND 
---------- 
 
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. 
 
SUPPLY AND DEMAND CONDITIONS 
---------------------------- 
 
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 
currencies 
 
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 
customers. 
 
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 
 
 
YAMAMOTO