Currency SWAP What it Holds for Ethiopia, its Neighbors

During the recent Joint Sudanese-Ethiopian Technical Economic Committee meeting held in Addis Ababa, currency swap between the two countries was at the centre of the discussion.
Currency swaps (or cross currency swap) is the exchange of one currency with another currency while doing business. Officials in Ethiopia believe that the country can reduce dependency on hard currencies by introducing cross currency swap among its neighbouring countries. EBR’s Ashenafi Endale explores the issue to assess what will be the benefits for Ethiopia as well as its neighbouring countries.

Last month, officials from the Central Bank of Sudan were in Addis Ababa to discuss issues of currency swapping with Ethiopia. This involves the exchange of one currency with the other currency, with their counter at the National Bank of Ethiopia (NBE). The inconvertibility of the two currencies was at the core of the discussion, on which experts took longer time detailing calculations.
After a weeklong discussion, the governors of both central banks agreed upon the importance of the Commercial Bank of Ethiopia (CBE) to open a branch in Khartoum to facilitate the currency issue and strength trade and investment between the two countries.
Currency inconvertibility is one of the basic challenges to intra-Africa trade. Investopedia, a leading source of financial content on the web, defines inconvertible currency as currency that cannot be easily exchanged with another currency because of foreign exchange regulation or physical barriers. This definition fits with the relations between the Sudanese pound and Ethiopian birr since it is almost impossible to directly convert one of these currencies with the other in the formal market.
Elias Loha, advisor to the NBE governor and a member of the Joint Sudanese-Ethiopian Technical Economic Committee explains the progress made between the two countries. “Since foreign banks are not allowed to operate in Ethiopia, CBE will be responsible for handling the currency swap between the two countries,” he told EBR.
In the past, Ethiopia and Sudan have been able to sign numerous protocols and agreements negotiated under the Joint Sudanese-Ethiopian Technical Economic Committee paving the way for continued and mutually beneficial cooperation in the areas of trade and infrastructure interconnections. In recent years, Sudan and Ethiopia have agreed to implement cooperation projects, including establishing economic zones, free markets between the two countries and a currency swap deal.
Currency inconvertibility is cited as the major trade and investment hindrance for developing countries, where the shortage of hard currencies that are widely accepted around the world as a form of payment for goods and services are immense.
As a result, many countries are considering currency swap deals to tackle foreign currency shortage and boost trade and investment activities as well as to service their debt. Although currency swaps were originally introduced in the 1970s due to circumvent foreign exchange controls in the United Kingdom, many countries have since adopted the method.
For instance, China has multiple year currency swap deal with 11 countries including Argentina, Brazil, Hong Kong, South Korea and United Kingdom. The deal that was made in 2013 between United Kingdom and China is worth USD33 billion while Chinese agreement with Uzbekistan stood at USD100 million.
Similarly, South Korea signed currency swap deals with Indonesia in 2013 worth USD10 billion to promote bilateral trade and strengthen financial cooperation. This deal also allows the settlement of trade bills between the two countries even in times of financial strain.
International experiences demonstrate the benefits of such deals. Since 2013, South Korea imported goods worth USD13.2 billion from Indonesia while its export plumped to USD11.6 billion.
Studies conducted on the subject indicate a far-reaching benefit of currency swap, which can be a source of motivation for countries like Ethiopia and Sudan to follow the same path as their counterparts in South East Asia. A study prepared by Stanford University revels that currency swap allows a country to save the precious hard currencies it have while importing basic commodities from abroad.
Trade relations between Ethiopia and Sudan sheds light on the potential of currency swap for the two countries. Ethiopia used to buy 80Pct of its fuel demand from Sudan, using the US dollar as medium. If the currencies of both countries were convertible, Ethiopia could have saved close to USD1 billion, annually.
Sudan is the third biggest export destination after Somalia and Djibouti in Africa for Ethiopian products with USD70 million in 2015/16 fiscal year, according to a data obtained from the NBE, while Ethiopia’s import from Sudan stood at USD460 million, which can be facilitated using the currencies of the respective countries and save the hard currency for other purposes as well as narrowing the balance of payment.
In recent years, Ethiopia’s annual export earnings have not exceeded USD3 billion, far behind the import bill that stood at USD16.7 billion in 2015/16, which makes the trade deficit to reach USD13.9billion. Currently, Ethiopia trades even with its neighbours with scarce foreign currency.
Shemeles Arega, communication officer at the Ministry of Trade lauds the importance of narrowing this trade deficit using different methods: “Ethiopia can use the bi lateral trade agreements signed with neighbouring countries to boost trade relation and fill the trade gap.”
Elias stresses that it is not only for Ethiopia that the deal is beneficial. “Sudan faces foreign currency shortage after it stopped exporting oil,” he says. “So, the benefit is for both countries.”
In fact, looking at the trade relationship between Ethiopia and its neighbours helps to see the level of benefit for Ethiopia as well as its regional counterparts. In 2015/16, about 20.8Pct of Ethiopia’s USD2.8 billion exports went to Africa, mainly Somalia (55.8Pct), Djibouti (21.5Pct), Sudan (12Pct), Kenya (4.9Pct), which altogether accounted for 94.2Pct of the total exports to Africa. Ethiopia’s total export earnings for the fiscal year were around USD2.8 billion.
On the other hand, Africa accounted for about 3.9Pct of Ethiopia’s total imports which stood at USD16.7 billion in 2015/16 fiscal year. Some of the major countries of origin were Sudan and Kenya, which accounts6.5Pct and5.2Pct of the total import bill, respectively.
In addition to curbing the existing foreign currency shortage and the low level of regional trade, Elias says the currency swap deal will have a positive impact on the level of investment among eastern African countries. “Some of Ethiopia’s neighbouring countries have the potential to invest in Ethiopia,” he argues. “So, the deal can encourage these investors to look for opportunity more seriously.”
Certainly, Eastern African country like Sudan has the largest investment project in Ethiopia, among African countries, with 1,075 projects registering an ETB929 million in capital. According to information obtained from the Ethiopian Investment Commission, 109 projects have so far become operational between February 1993 and November 2016.
There are also additional 147 investments joint ventured with Sudanese and other investors from various countries including Ethiopia. The total 1,222 Sudanese related investments in Ethiopia are large compared to the 267 total investments made in total by Kenya, Somalia and Djibouti altogether.
According to Elias after a few months there will be a meeting between representatives of Sudan and Ethiopia in Khartoum and Addis Ababa. “These meetings will pave the way for a concrete deal, which is not only benefites the two countries but also most East African countries that are left behind in this regard,” he anticipates.
Indeed, Eastern African countries lag behind Western African countries that expressed their desire to speed up the process of not only currency swap but also monetary integration initiated in the early 1980s, crystallized in a project for the two-phased creation of a single currency in West Africa starting from 2000.
Although, member states of the West African Monetary Zone (WAMZ) planned to launch a single currency called ECO in January 2015, the deadline has been extended to 2020. However, Some of Western African countries still have currency swap deals with neighbouring countries as well as their largest trading partners.
In this regard, the recently agreed upon currency swap deal between Nigeria and China is an attempt for the former to fix its ailing currency and fund a record budget deficit. Last year, during Nigeria’s president Buhari visit to Beijing, the Industrial and Commercial Bank of China and Nigeria’s central bank signed a deal for same.
“It means that the renminbi (yuan) is free to flow among different banks in Nigeria, and the renminbi has been included in the foreign exchange reserves of Nigeria,” Lin Songtian, director general of the African affairs department of China’s foreign ministry, told reporters at the time.
Elias says Ethiopia and its neighbours haven’t been left behind much. “There is a negotiation between Ethiopia and Somaliland currently, which might end up with agreement on currency swap,” Elias explains. “But for the moment this negotiation is limited to opening offices at the border in order to facilitate trade between the two countries.”
According to Elias there is also some indication that Ethiopia and Kenya might follow the same path. “In the last visit of Prime Minister Hailemariam Desalegn to Kenya, there was a discussion about currency union between the two countries and with the rest of the region,” he recalls. “Such endeavours indicate that Ethiopia is on the right track although more efforts should taken to fasten the process.” EBR