Remittances have proven to be a viable way to earn foreign currency. Last fiscal year Ethiopia earned USD3.8 billion this way, which is 27Pct more than export earnings. By some estimates, the country could earn nearly USD21 billion from remittances in five years. This can help fund financing gaps that emerge due to poor export performance, decreased bilateral funding as a result of recessions in developed countries, and meagre foreign direct investment (FDI). Experts note that remittances have the added benefit of exposing more people to formal financial systems. To that end, a number of banks are working to improve their services to bring in more foreign currency. Some people, however, feel that the ambitions of the banks and the government may be premature. EBR’s Fasika Tadesse researched the nuances of the issue to gain greater insight into the potential of remittances as a means of financing Ethiopia’s ever-expanding development.
Just like its predecessor, the second phase of the Growth and Transformation Plan (GTP II), which was ratified by Parliament at the end of 2015, sets ambitious targets to transform Ethiopia’s agrarian-based economy to an industry-driven one within the next five years.
For this to happen, the share of the agricultural sector’s contribution to gross domestic product (GDP) must shrink to 33.5Pct by 2019/20 from the current 38.5Pct. Meanwhile, the service sector’s contribution to the national economy is expected to decrease from 46.3Pct to 44.3Pct within the same period.
The country’s ambitious plans will depend largely on its manufacturing performance. The government hopes that the contribution of the industrial sector, which they believe can drive the economy to middle-income status by 2025, should increase from the current 15.1Pct to 22.3Pct by the end of the five-year Plan.
To achieve this, the country needs to solicit USD119.5 billion to import the necessary goods and services to uplift the economy, of which 30Pct will be utilised by the industry sector.
This bulk of foreign currency demand comes from the service sector, accounting for USD49.8 billion, or 41.7Pct of the total amount, while USD4.8 billion (4Pct) is needed for the agriculture sector. In addition to this, the country needs USD15.3 billion, or 12.8Pct, to purchase fuel; USD7.2 billion, or 6Pct, for loan repayment; USD3.8 billion for foreign currency reserve; and USD2.8 billion for money transfer and foreign exchange services payments.
Government officials believe the success of the GTP II relies on the amount of finance the country manages to collect and spend. “We need money during the coming five years mainly for infrastructure development, such as the construction of roads, universities, industrial parks, and dams,” said Haji Ibsa, Director of Communications at the Ministry of Finance and Economic Cooperation (MoFEC).
To satisfy these immense foreign currency needs, the government puts its hope in the export sector, although statistics show that the country failed to meet its export earning targets in the past five years. The government plans to earn USD45.4 billion (38Pct of the total foreign currency requirement) through exports between 2015/16 and 2019/20. However, last fiscal year the country only managed to secure roughly USD3 billion from exports, 40Pct short of the planned target.
The government acknowledges that export performance fluctuation is a hindrance in financing its development goals. In fact, it’s one of the key lessons that was taken from the first phase of the GTP. In a draft document of the GTP II, the government states that a number of problems – including decreased commodity prices, shortfalls in export volume, and a lack of raw materials, among others – contributed to a deficit in funds from exports.
The same document, however, demonstrates that, along with foreign direct investments (FDI), private remittances helped to assuage the effects of the financing gap. The latter has already proven to be a growing source of foreign currency for the country, but have received relatively little attention until recently. Within the next five years, remittances alone are expected to amount to USD20.8 billion in total.
This seems ambitious, but countries like Nigeria and Egypt receive in one year what Ethiopia plans to obtain in five. According to the World Bank, the two countries mobilised USD21 and 20 billion in remittances, respectively, in 2014.
Data obtained from the National Bank of Ethiopia (NBE) states that the country’s foreign currency earnings through remittances was USD1.84 billion during the 2009/10 fiscal year but reached USD3.79 billion last fiscal year, nearly USD800 million higher than the country’s export earnings. On the other hand, export earnings have stagnated in the past three years, which doesn’t bode well for its future earning prospects.
Remittances have not only outperformed the export sector, they’ve caught up with Ethiopia’s other form of earning foreign currency: FDI. The total FDI inflow during the first four years of the first phase of the GTP was USD5.01 billion, whereas the country earned roughly USD3.7 billion in remittances each year, on average, since the 2011/2012 fiscal year, according to the IMF.
The Fund even acknowledges the importance of remittances in supporting Ethiopia’s balance of payments, amounting to 8Pct of the GDP during the 2013/14 fiscal year. They project that these monies are likely to average 7Pct of GDP in the next five years, while FDI will likely remain 3 to 5Pct during the same period.
This method of finance mobilisation is an especially fruitful opportunity to gain foreign currency, as other means – such as loans and grants – are less dependable and susceptible to shocks in the global market.
According to the NBE, last year’s net official transfers declined due to diminished funding from international financial institutions and bilateral donors following financial crises in several European countries. At the same time, following the decline of global commodity prices, last year’s export earnings declined by 8Pct from the preceding year, according to data from the Ministry of Trade (MoT).
In spite of this, different researches stress that remittances are becoming a steadily growing external source of capital for developing countries. This is because while FDI and capital market flows fell sharply in recent years due to recessions in high-income countries, remittances continued to grow. In fact, research reveals that their importance in compensating the human capital loss of developing countries through migration and their potential in boosting economic growth was already recognised in the 1980s.
According to the 2013 annual report of the United Nations Conference on Trade and Development, remittances are more stable and predictable as compared to other financial flows and, more importantly, they are counter-cyclical, providing a buffer against economic shocks. Even in conflict or post–conflict situations, they can be crucial to survival, sustenance, rehabilitation, and reconstruction. In providing primarily for household livelihoods, they are spent on general consumption items in local communities that contribute to economies by supporting small businesses.
The African Development Bank (AfDB)’s analysis echoes these sentiments – adding that they also spur economic activity and have the potential to increase financial literacy. According to information published on their website, the AfDB says the implications are especially promising for low-income households that are usually relegated to the margins of traditional economic institutions. “Since remittances generally accrue to low-income households, [which] may be induced to save a portion of these flows, thereby connecting them to the formal financing system. Furthermore, remittances could be a catalyst for investment and economic growth by supporting small business start-ups.”
Since a fair share of these expenditures are directed to the construction of homes, health care and education, alongside savings in financial institutions, it helps to generate employment in these critical service sector industries. Moreover, in contributing to foreign exchange earnings, remittances can spur economic growth by improving sending countries’ creditworthiness and expanding their access to international capital markets.
Despite these multifarious benefits, the government is still focusing on the export of goods and services as a major source of foreign currency to realise the goals of the GTP II, even though remittances enabled the country to earn hard currency that was 27Pct higher than the export earnings during the 2014/15 fiscal year. “During the next five years [we] will work massively in increasing the export of goods and services in both quality and quantity,” said Yinager Dessie (PhD), Commissioner of the National Planning Commission, during a press conference last month.
He also stated that export will serve as a major source in financing local projects. In addition to this, he made it clear that the government is seeking support through other avenues: “We approached international development partners to grant or lend us money, and we are awaiting their responses after giving them a draft of the Plan.”
The government is resolute in its efforts to bolster the manufacturing sector to make it an intrinsic, enduring part of Ethiopia’s overall development, perhaps explaining why remittances haven’t received as much attention as some think it should. Yet, this sharp focus on the export of manufactured products is concerning for some because it’s proven to be unreliable. Meanwhile, remittances are growing exponentially and have, for at least a few years, brought in more foreign currency than the export of all goods.
Some financial insiders allude to the fact that the government should rework its strategy. Taye Dibekulu, President of United Bank, argues that the country needs more diverse sources of finance to fund its ambitious plans. “The main problem in earning foreign currency is the limited sources,” he stresses. “So [every] bank is striving to earn hard currency [through] remittance and export.”
The same goes for Dashen Bank, the largest private bank in the country. “Most of the time the share of [the country’s] foreign currency sources fluctuate year-on-year for several reasons, such as global commodity price decline and financial crisis in different European countries,” says Afsaw Alemu, President of the Bank. “But remittances and export are the major sources of foreign currency for Dashen.”
Private banks aren’t the only institutions that have caught on to this trend. Epherm Mekuria, Communications Manager of the state-owned giant Commercial Bank of Ethiopia (CBE), which is the main mobiliser of remittances to the country because it works with more than 20 money transfer agents, says his bank will play a greater role to achieve the government’s target. They plan to collect USD50 billion in foreign currency by the end of the 2019/20 fiscal year, which is roughly 42Pct of the foreign currency needs of the GTP II.
“As the remittances that transact through our bank have been increasing every year by 20Pct for the past five years, we can reach the targeted plan,” he told EBR.
For years, the Bank has been mobilising a significant amount of foreign currency that’s needed to import commodities and machineries. In 2009/10 it fetched USD2 billion; that figure reached USD4.8 billion last fiscal year. This year, the Bank earned USD2.3 billion during the first half of the current fiscal year and hopes that figure will jump to USD7.5 billion by the end of June.
Remittances were the major contributor to the foreign currency earnings of the CBE last fiscal year. Of the USD4.8 billion in total earnings, USD2.7 billion, 56Pct, came in the form of remittances and were directly sent to the beneficiary or through the SWIFT code of the Bank. They received USD1.6 billion from service providers such as Civil Aviation and Ethiopian Airlines; USD881 million from official transfers from NGOs and embassies; USD300 million from foreign currency purchases; and USD972 million from exports. Additionally, of the first half current fiscal year’s USD2.3 billion earnings, USD2.06 billion, roughly 90Pct, were from remittances, according to data from the Bank.
In response to the increased significance of remittances, banks are now giving special attention to them as a major source of foreign currency by improving service quality.
For instance, Dashen had been working with one transfer agent, Western Union, for several years. However, recently it increased that number to eight agents and plans to arrange agreements with new ones. This will enable the bank to increase the share of remittances in the foreign currency it mobilises, according to Asfaw.
On the other hand, the CBE is working towards improving service quality by opening a special window in each of its branches to deal exclusively with remittance services.
Additionally, the Bank is preparing different forums with Ethiopians in the diaspora to convince them to use CBE’s services, sponsoring several programmes to advertise the service; dispersing massive advertisements through various media; and prizes, which the Bank awards to people who utilise their remittance services during holidays, according to Ephrem.
Small and new banks in the industry are challenged to win the market, as they have limited clients. For instance, Enat Bank, the newest in the sector, has not had the chance to work with the giant money transfer agents such as Western Union, which transact large sums of hard currency.
“They demanded us to increase our branches to 10 and when we reached 10 they revised it to 20, so we are working to reach that number to partner with them,” says Wondwossen Teshome, President of the Bank.
But with all of these challenges, the Bank’s executives are working on a campaign to approach foreign investors, exporters, NGOs and Ethiopians living abroad to work with them, according to the President.
While all banks are working and stepping up their strategies to increase foreign currency earnings from remittances, the MoFEC is also working to boost hard currency gains. “We are developing a strategy for remittances, [which will help the country to increase earnings] along with the other tax amendments we are currently working on with the [Ethiopian Revenues and Customs Authority], which will be finalised soon,” said Haji.
Their hope is to better harness the potential of remittances in financing Ethiopia’s plans to become a manufacturing powerhouse. If done properly, research suggests, the country may soon create an economy in which the idea of financial independence becomes increasingly tangible and accessible to more people in all socioeconomic strata. EBR
4th Year • February 16 2016 – March 15 2016 • No. 36