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    CommentaryFranco Valuta is backfiring on the poor, haunts economy

    Franco Valuta is backfiring on the poor, haunts economy

    Date:

    Myriad of policy amendments are being rushed into action, in a bid to spare Ethiopia’s economy from further deterioration and reach a breaking point. The number of amendments introduced to escort the reform effort in the past four years, is more than what we had in the past decades.

    Nonetheless, not all of these amended laws are hitting the jackpot, and the government is not evaluating their impacts. One of these policy changes that missed its target is the government’s decision to allow imports under the Franco Valuta scheme.

    Basically, Franco Valuta scheme allows Ethiopians who have their own foreign currency to import commodities without going through the hectic Letter of Credit approval and forex allocation from commercial banks. In some cases, it takes over one year to get the forex allocation.

    The government allowed the scheme in April 2021, for basic commodities like edible oil, wheat, sugar, rice, milk and flour. In April 2022, the Ministry of Finance also lifted the minimum threshold of USD 250,000 previously placed to import under the scheme.

    Understandably, the logic behind the decision to allow Franco Valuta is a kneejerk response to control the skyrocketing inflation in the domestic market. The astronomically growing inflation is not only a result of wrong monetary policies like the nonstop devaluation, but also a substantial decline in the supply side capacity of Ethiopia’s economy.

    Over the past five years, supply has been haunted by drought, desert locust, COVID-19 and war. Officials at the Ministry of Finance repeatedly said Franco Valuta will help the low income population access at least basic items at an affordable price.

    However, the policy is achieving none of its initial intentions and rather is backfiring on the poor as well as hurting the economy.

    Commodities worth USD 1.8 billion entered the country during the first half of the current fiscal year, up from the USD 1.1 billion recorded during last year’s same period, according to the National Bank of Ethiopia’s report. Food and live animals constitute 27 percent; medical and pharmaceutical products nine percent, machinery eight percent and fertilizer at 5.8 percent. Even vehicles, textile products, metal products, beverages, rubber products and other items are also imported under the Franco Valuta scheme.

    Yet, the negative impact the scheme entails is devastating. There are two major impacts growing out of the decision to allow Franco Valuta.

    The first is the source of the forex being used for Franco Valuta. Basically, Franco Valuta was meant for Ethiopians who have foreign currency abroad to directly pay for the imports. In reality, most of the Franco Valuta commodities are coming from neighboring countries, such as Djibouti, Somalia, Kenya, Sudan and others. Of course, there are many surplus commodities in neighboring markets, which can easily enter the Ethiopian markets.

    However, since there are fewer Ethiopians with forex on hand in these countries, a faulty trick is being used to bleed the forex and use it for the Franco Valuta. To this end, gold, hard currency notes, coffee, live animals, oilseeds and even grains are being smuggled out of Ethiopia to neighboring countries, at higher rates.

    Once these items are smuggled out of Ethiopia and sold, the forex is then used to import under the Franco Valuta scheme. Even foreign nationals, mainly Somalians, are deeply engaged in this business now. Most of them attained a business license through relatives in Ethiopia.  

    This growing trend is in turn affecting the supply side in Ethiopia’s economy. Ethiopian products smuggled through borders, is draining the local supply side. Furthermore, forex sources like remittance and even the black market in Addis Ababa, is being diverted towards feeding this scheme, further depleting Ethiopia’s forex reserves.

    Most of the forex generated from the illegal outflow of products from Ethiopia, is not being used for Franco Valuta either. Rather, it feeds the black market, which in turn is deteriorating NBE’s forex reserves. The LC backlog at commercial banks has reached beyond tolerance. Commercial banks, which are deep in the parallel market, lately doubled their commission over informal forex trading.

    Though the directive states that the NBE must verify the source of the forex used to import, little has been done to this end. The key action the central bank accomplished to at least block the influx of forex from official channels into the parallel market to feed Franco Valuta importers was banning commercial bank branches in Togochale from processing forex.

    This border town near Somalia, is not only a hotbed for east African contraband networks targeting Ethiopia, but also the connection point between Ethiopia’s official economy and the parallel one. Dozens of bank branches in a tiny border town serves as a rubber stamp to legalize informal trades, both going outwards and inward. If the NBE did not ban those banks from processing forex, Ethiopia’s economy would have been in a huge crisis by now.

    The second big flaw caused by the Franco Valuta, is the surging prices of imported commodities in the Ethiopian market. The prices of commodities entering Ethiopia under the scheme are inflated by up to 80 percent. This is to compensate the cost of the forex. The price of the commodities is mainly determined by brokers and these brokers connect the informal commodity suppliers roaming the Horn of Africa, with traders in Ethiopia.

    Even though the government exempted Franco Valuta commodities from taxes, the prices skyrocketed once the commodities reached Ethiopia. The poor and low income population in Ethiopia is not benefiting from the scheme, instead, few traders and some foreigners benefit the most, by adjusting the Franco Valuta scheme, to their nature of business.

    The problem in Ethiopia now is that low income households cannot cope with the inflation rate. In the past decade, prices increased by more than 60 percent, while income increased by around 10 percent.

    Needless to say, inflation stood at 36.6 percent in May 2022, up from the 26.7 percent registered in April 2021 when the Franco Valuta was allowed.

    Currently, Ethiopia has the third highest inflated economy in Africa, next to Sudan and Zimbabwe. Though there are other factors for the surging inflation in Ethiopia, Franco Valuta is adding fuel to the fire. It is proving difficult for the government to trace the source of the forex, price of commodities imported under the scheme, and finally to regulate end prices and how the poor get the commodities at an affordable price.

    Franco Valuta essentially works for countries that have a large diaspora community with a disposable forex at hand. In case of Ethiopia, the diaspora who have such forex is limited and reside in America or Europe. But commodities that are needed to be imported under the Franco Valuta are found in neighboring markets in east Africa.

    The policy is being exploited by foreigners who are getting a business license informally. They are not only smuggling out products from Ethiopia to feed their forex needs but also diverting official forex sources into the contraband economy.

    Contraband trade has always been there and Franco Valuta gave it a new momentum. In a nutshell, a year down the road, a policy instituted to tame inflation, ensure people have access to basic commodities and ease the supply side crunch in the domestic economy, did not meet its objective.

    The government must assess the real impact of policy actions it has been churning out in the past few years. Ethiopia allowed Franco Valuta without assessing and making sure the vital circumstances needed to make it work, are in place. Domestic producers are also suffering as a result of the scheme.

    The challenges we are facing from complications arising from Franco Valuta, are far grave than the challenges we face without the Franco Valuta. Hence, the government should reverse its decision and refrain from desperate policy actions in response to dwindling forex shortages. Kneejerk policies only open loopholes. The forex shortage can only be healed by empowering local producers, capitalize on import substitution, and maximize exports.

    Contributed by Zelalem Tamir

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