Why & How Ethiopia is Losing its Precious Commodity
A decade ago, gold constituted close to one-fifth of the total export earnings of Ethiopia. But the country has not been able to sustain this momentum. Last year, export income from gold plummeted to a dismaying USD32 million from 654 million in 2011/12 fiscal year. This is largely due to the growth of contraband trade and the closure of mining companies for allegedly polluting the environment. EBR’s Ashenafi Endale investigates.
Sitting idly at the office in the middle of a working day is not a surprising experience for officers of the gold purchasing center located in Hawassa. Deployed by the National Bank of Ethiopia (NBE), these officers might even spend a whole working day without receiving or buying gold from suppliers, a mandate which they are given to accomplish.
“We have been almost inactive for the past two years,” an official working at the center tells EBR. This is not because of negligence nor lack of enthusiasm amongst the officials. Rather, it is a result of the huge drop in gold supplied by artisanal miners. In fact, less than five percent of the gold targeted to be collected at the center was attained in the past three years. Even worse, in Ethiopia’s southern state where the gold center is located, gold sourced from artisanal miners dwindled from 878 kilograms in 2010/11 to 230 kilograms in 2018/19.
It is no different in the first quarter of the current fiscal year. In the Southern Nations, Nationalities, and Peoples’ Region (SNNPR), only 24 kilograms of gold were collected from artisanal miners out of the targeted 500 kilograms in the first quarter of 2019/20.
The decline in gold supply is not confined to a single region. It is widely visible throughout Ethiopia. In all gold producing regional states such as Tigray, Oromia, Benishangul, Gambella, Afar as well as part of Amhara, the gold supply from artisanal miners is becoming as scarce as a blue moon. NBE’s gold purchasing centers in Shire, Dema, Gambela, Mizan Tepi, Pawi, Assosa, Hawassa, and Shakiso stay days and weeks without transacting. Artisans in these gold producing regions, supplied less than 10Pct (close to 38 kilograms) of the target during the first quarter of 2019/20.
When officials of the Ministry of Mines and Petroleum (MoMP) presented a report regarding the development of the mining sector on November 6, 2019, they encountered strong criticism from Members of the Parliament (MPs). “Part of the problem is the Ministry itself,” said one MP. “Most of the officials at Ministry are deeply connected in corruption with traditional gold miners. The refusal of regions to cooperate with the federal government has also worsened the problem.”
Yet, there is a glimpse of hope. Ezana Mining that started gold production in 2018 with investment capital of USD17.8 million in the state of Tigray, managed to perform better. The company supplied 108 kilograms out of the 111 kilograms it planned for the first quarter of the current fiscal year. Kefi Minerals, an Australian gold mining firm at Tulu Kapi, west Oromia, is another hopeful project in the near future, but it has not started production until now.
“Fifteen large scale gold-mining licenses have been issued by the federal government, of which three are producing whilst another three are at the research stage. Nine are also in pipeline,” says Abebe Bedassa, Mineral License Administrator at the Ministry.
However, things are not looking good for MIDROC’s Legedembi site, which has been supplying an average of 4,000 kilograms of gold annually for the past two decades. This is because the company stopped operations and is now stuck in limbo after MoMP refused to renew its license in 2018. Sakaro, a new underground gold mining site developed by MIDROC is also out of operation, although it is licensed up to 2029.
Although it is not a gold production site, Kenticha Tantalum Factory has also been closed for two years by the state of Oromia’s Environment Protection Authority for allegedly polluting the environment. Although the Factory agreed to take corrective measures before resuming operations, regional and local officials, supposedly fearing protests by youths, refused to allow it to resume operations. Meanwhile, the Factory has lost more than half a billion Birr following its closure, whereas the country is losing a considerable amount of potential forex from the mining sector.
In fact, the amount of foreign currency Ethiopia is earning from exports of gold is dwindling continuously. It plummeted to a shocking USD32 million in 2018/19, down from 654 million in 2011/12—a year of the highest recorded earnings—and gold almost became the second largest foreign currency generator after coffee. According to NBE’s report, export earnings from gold plummeted significantly mainly due to the 92.5Pct drop in volumes in the past seven years, resulting from the preference of artisanal miners to sell their gold through the underground black market.
Artisanal mining has existed in Ethiopia for centuries. It is a non-mechanized mining operation practiced by non-professionals and is a primary source of employment for thousands in various parts of the country who are relatively disadvantaged in the labor market. An estimated five million people are directly or indirectly beneficiaries of the mining sector. Artisanal gold is mainly produced in peripheries of the country along the extensive borders of neighboring countries. However, insignificant volumes of gold is produced in many areas throughout the country, though not recognized by NBE.
While the gold supply in the formal market is nose-diving, the underground trade of smuggled gold, largely undertaken by artisan miners, has transformed into a well-established network stretching from Ethiopia, to across east Africa, and extending to its main gateway, the Middle East. “The gold decline in Ethiopia has two main reasons. The first is contraband, while the second is the joining of mass youths into the sector without skill, capital and technology,” says an official in the state of Oromia. “These youths just hold onto the land. But the illegal miners are even ahead of government institutions, in terms of technology, skill, and market networks.”
Such a trend has pushed out legal investors, who brought capital, skill and technology.
Navigating through smuggling routes
Smuggling of gold is undertaken using underground networks extending from east Africa onto the Middle East. Smugglers buy the gold from artisans at higher-than international prices because they gravely want the gold for money laundering purposes, according to Anteneh Fekadu, head of Mining and Energy Bureau of SNNPR. Even NBE’s measure to pay artisanal miners a five percent premium on the average international price did not change their mind, instead preferring the parallel market as payment is in foreign currency on top of the higher prices.
Both legal and illegal miners are part of the network. Legal miners include small scale private operators as well as youth enterprise associations formed by the mining bureaus of the zones and weredas. Illegal miners, on the other hand, are groups of armed people with modern small-scale mining technologies. The office of the Attorney General recently even found illegal miners with around 40 modern gold extracting machines in Dima, Gambela region. Gold, emerald, opal, sapphire, aquamarine, amazonite, and other industrial and construction mining items are amongst the items smuggled by contrabandists.
“The illegal miners can be Ethiopians or people from neighboring countries. Especially mining sites on border areas are totally controlled by them and it is impossible to get close to such areas,” says Birtnesh Mekonnen, Head of Mining Operations and Marketing at SNNPR. “They fire and kill anybody who tries to intrude.”
Some of the illegal miners also undertake operations in Addis Ababa jewelry shops as some retail shops obtain minerals illegally as they are not obliged to declare their sources. To avoid taxes, these shops usually do not use VAT receipts, according to research conducted by the Office of Attorney General.
Once the gold is obtained by individuals and groups illegally it will be sold to the main smugglers: groups of larger networks of people operating in different parts of the country. These smugglers finally take the gold out of Ethiopia using tourists, exporters, illegal traffickers, contrabandists, and crime groups.
The smugglers buy a gram of gold from artisanal miners for between ETB1,300 to 1,800, which is much higher than the ETB1,000 NBE offers. The price is even higher than the international gold price, which stood at USD47 per gram (ETB1,300) as of November 2019. “The underground gold market transacts using foreign currency exchanged in the parallel market, which is highly lucrative. Additionally, there is a minimum of ETB500 difference between the NBE’s and smugglers’ buying prices,” stress Anteneh.
But the underground gold network rarely allows strange people in. Every person in the network at the collecting, supplying, buying and exporting levels is well identified and transaction is strictly forbidden with any outsiders, according to an insider. Even if someone new tries to smuggle the gold through jungles and is discovered by anyone in the contraband network, they will be killed in order to take their gold, according to Insiders.
Once the gold is collected, it is smuggled out of Ethiopia mainly via the Sudanese, Kenyan and Somalian borders. Gold from the southern regions, for instance, is smuggled away through four routes. The first is through Dima, in Gambella, and on to Sudan. The second route leaves through the eastern part of Ethiopia, from Bale and Borana. The third route goes out via the Moyale and Yabelo route to Kenya. The fourth route is smuggling through Bole International Airport.
According to Wondwossen GebreMichael, a seasoned driver in South Omo zone, the border economy is supported by illegal mineral mining. “Currency trade business along the border areas is hot,” he says. “Most of the miners in the area also sell gold and buy other items.”
Contraband routes, especially those serving as a passage for precious metals, have become hotspots for conflict as armed groups fight for the profits from this illegal enterprise. Shootings and killings, hence, are common in the illegal mining market. “The mining sector in Ethiopia is highly exposed to contraband and illegal miners, who are smuggling in illegal warfare weapons with the money. Ethiopia is not only losing millions of dollars to the contraband trade, but there is also an opening of a road to political conflicts and instability, since the illegal mining money is financing violence,” says Samuel Hurkato (PhD.), Minister of Mining and Petroleum. “Many legal miners sell less than 10Pct of the gold that they collect to the NBE, and this just to retain their licenses. The rest is sold in the black market. Tourists and corrupt government officials have their own networks in facilitating the trade,” says an insider EBR spoke to.
The illegal miners and smugglers are ahead of government, in terms of geology, technology and market tactics. Officials cannot even go to the gold mining areas due the insecurity posed by illegal miners and smugglers. The regional forces are reluctant nor unable to stop the illegal miners, some of whom are armed. “The federal government must use force to overtake the mining areas and provide sustainable security for investors and legal miners,” stress Iyasu Mamo, director of Mining Study and Administration Directorate at Mining and Energy Bureau of SNNPR.
The final destination
United Arab Emirates (UAE) is the final destination to much of the gold traded in the underground market. A minimum of three tons of gold is illegally smuggled to the UAE, every year from Ethiopia, while Sudan, Libya, Egypt and Ghana hand over 30 tons of gold to UAE each. Congo also loses up to USD600 million worth of gold annually.
The smugglers in central and east Africa use Dubai, UAE’s gold trading capital as a gateway to markets in Europe, USA and beyond. A report by the UN also found out that the UAE imported USD 15.1 billion worth of gold from Africa in 2016, higher than any other country and it is 11 times higher than its imports in 2006. The total weight imported in 2016 was 446 tons, in varying degrees of purity, up from 67 tons in 2006. The report also revealed the data variance between the exporting countries and UAE. The gold import data in UAE shows higher figures, while the exporting countries have no official data regarding UAE gold exports to UAE.
The freshly smuggled gold from Africa is usually documented as ‘scrap’, by buyers and refineries in Dubai, which also only transact in cash, to avoid leaving any traces. In addition to direct shipments, Sudanese gold, for example, was thought to be transported through airports in Eritrea, Ethiopia, Qatar and Bahrain, the report says. Significant amounts of gold is also traded in Ethiopia in cash. Also, Dubai-based refiners frequently trade horizontally with other refiners, creating vulnerabilities and loopholes in global supply chains.
The problem in east Africa has worsened especially due to the economic sanctions on Sudan, in addition to the country’s geographical proximity to Dubai; with both contributing to the criminal dynamics. Next to UAE, India is the second largest receiver of gold smuggled from Africa. This is following the Indian government’s incentivizing provisions looking to fill the gold supply gap since 2014 for their local gold refineries. The measure has attracted significant gold smuggling to the East Asian country with comparatively better prices, which the refiners later compensate by the incentives, the UN report says.
According to the 2018 Crime Development Paradox report on Africa, gold smuggling is not only attractive to criminal actors that want to maximize profit, but also an instrument to launder money. Illicit profits are used to buy gold or gold products that are either smuggled or laundered into formal supply chains. Gold is a desirable financial vehicle to move and hide wealth because it is almost untraceable and it also possesses a high level of liquidity. This, coupled with the rampant corruption existing in Africa and transit countries, paves the way for gold smuggling businesses to thrive.
Gold and money laundering are further facilitated through the use of mobile banking and money transferring systems, specifically Hawala. Gold is highly fungible, and commonly recognized globally as an alternative currency. It is commonly used by traders to facilitate cross-border trade. By using gold to pay for goods, traders can avoid losses on currency exchange, high banking costs, taxes, and remittance requirements.
The way forward
Mining is one of the six areas identified by Ethiopia’s new homegrown economic reform program with the vision of generating billions of foreign currencies and job opportunities for three million people. “We need to create quality, decent jobs for the youth urgently; increase capital, improve foreign currency; and also initiate the fourth industrial revolution,” says Samuel.
The Ministry is also preparing a 10-year roadmap, strategy and policy direction for the mining sector. A new proclamation is also under preparation focusing on job creation and value addition as well as discouraging contraband trade. Illegal mining and transactions of minerals incurs up to an ETB150,000 fine, imprisonment and business closure, according to new proclamation under preparation.EBR