The Uphill Battle of Channeling Remittance Formally

The reliance on remittance has scaled up globally from household level to national economies following the massive workforce flow in the contemporary global economy. Ethiopia, a country that just woke up to this reality, has countless reasons to regard remittance as its biggest source of foreign currency. Especially in the last decade, remittance flows increased significantly surpassing export revenue. The annual remittance flow currently stands at USD5.3 billion. However, the annual remittance sent via official channels doesn’t match the huge number of Ethiopians residing abroad. EBR’s Ashenafi Endale investigates the reasons behind.

Solomon Tesfasellasie, a government official, was at tea break in the middle of a meeting at Ethiopian Skylight Hotel when he received a call from the Commercial Bank of Ethiopia (CBE) asking him why he didn’t use the bank as a channel to receive remittance from abroad in the last few months. Solomon’s response was simple: “Nobody sent me money from abroad in the last four months.”

This seemingly regular phone conversation shows how far banks are willing to go when it comes to securing hard currency. Although the state bank is the top generator of foreign currency in Ethiopia, its demand for forex is far from satisfied. Not only commercial banks but the entire country is in need of foreign currency. After registering double digit economic growth throughout the last decade, Ethiopia’s economy is now slowing down largely due to the scarcity of foreign currency in the country.

The landlocked country of more than 100 million people is heavily dependent on imports. Its annual import bill currently stands at USD15 billion. However, the annual export earnings have stagnated around USD3 billion for the last eight years. As a result, the account deficit widened to USD12.44 billion by the end of the 2018/19 fiscal year.
To reverse the situation, the country is turning its attention to remittance. Ever since the mid 1980s, the onset of migration of Ethiopians to the Middle East and the Gulf region in search of jobs and better pay, remittance flows grew marginally from USD4 million in 1977 to USD172 million in 2007. After 2008, however, the annual remittance flows increased sharply from USD790.3 million to USD2.7 billion in 2015. In consecutive years, remittance became the major source of foreign currency replacing export earnings. The annual remittance sent to Ethiopia reached USD5.3 billion by the end of the 2018/19 fiscal year. The current fiscal year is definitely on track to eclipse that figure as remittance flow in the first six months stood at USD4.6 billion.

Although this is a great achievement, the flow of remittance to Ethiopia is still way below its potential. Government estimates indicate over three million Ethiopians reside abroad. The annual remittance sent via official channels doesn’t, however, match this huge migrant stock.

Of course, as per National Bank of Ethiopia (NBE) estimates, the annual global remittance flow through formal channels constitutes only half of the total amount. The other half is sent via informal channels without passing through officially regulated businesses at both the sending and receiving ends of a transaction. A World Bank survey, on the other hand, raises the amount of remittance that flows through informal channels to Ethiopia as high as 78Pct. Some estimates reveal the amount of remittance sent to Ethiopia through formal channels of money transfer, such as commercial banks and money transfer operators, is only one-sixth of its potential.

The mechanics of formal remittance channels
In order to figure out why a significant portion of remittance flows is being captured by the informal market and identify the reasons for the continuously rising volume of informal remittance, it is important to understand how both formal and informal markets work.

There are two ways of transferring money to Ethiopia using formal channels. The first is via SWIFT (Society for Worldwide Inter-bank Financial Telecommunication), which is becoming the most popular means of transferring money worldwide. SWIFT membership has steadily increased since its introduction in 1974, with it becoming the leading network currently in use by most financial institutions such as banks to send and receive information, such as money transfer instructions quickly, accurately, and securely. According to the World Bank, close to 10,000 SWIFT member institutions send approximately 24 million transactions through the network each day.

This fast and effective network has been a key toot for the diaspora community to transfer money. Michael Girma, who just returned from the USA and used the network in the past at numerous occasions, knows how important the system is for Ethiopians living abroad. Members of the Diaspora community send money via SWIFT.

Data obtained from NBE also reveal the importance of SWIFT for remittance flow to Ethiopia. Around 60Pct (USD3.18 billion) of the total remittance that reaches Ethiopia annually is sent via SWIFT.

However, the system has a few flaws. The first is that SWIFT is only suited to transfer large amounts of money. That is because delving into a lot of small volume transactions comes at high operational cost. Yet, most of the Ethiopian Diaspora, use the network to send small amount of money for family and friends.

Although the majority of Ethiopians who live abroad send cash back home, the average remittance each of them send per year (USD962) is much lower than the amount sent by nationals of other sub-Saharan African countries. Per capita remittance from the United Arab Emirates (UAE) is the highest with USD1, 700 sent on average annually. Saudi Arabia, Italy and USA come next with USD1,300, USD1,200, and USA USD1,100 sent respectively, according to data from the NBE.

The second flaw emanates not from SWIFT itself but the backward nature of Ethiopia’s banking industry. Ethiopian banks have very little correspondent banking relationships and bilateral key exchange arrangements with banks operating in different parts of the globe. This means Ethiopians living abroad who wish to send small amount of money back home are forced to use other money options as they cannot access correspondent banks easily.
The other available means for sending money to Ethiopia is through money transfer operators. In Ethiopia, there are 69 money transfer operators licensed by the NBE. These operators work with Ethiopian commercial banks. Only one, Bole Atlantic, of these operators are based in Ethiopia while the rest are foreign based.

The majority of transactions made through operators are, however, monopolized by four foreign companies: Western Union, Dahabshil, Xpress and Money Gram. Out of the annual remittance channeled through operators, 90Pct is transferred via these four giants. Western Union accounts for 49Pct (close to USD1 billion) of the total remittance channeled through operators while the share of Dahabhsil, Xpress and Money Gram stands at 22Pct, eight percent and seven percent, respectively. Ethiopian based Bole Atlantic, on the other hand, handles four percent of the transaction.

The dominance of foreign based operators such as Western Union is not a surprising phenomenon. Their large coverage gives them leverage to be key players and dominate the global remittance industry for decades. For instance, the industry leader Western Union has presence in 500,000 locations through its agents in 200 countries worldwide.

The monopolization of the remittance industry by few operators is reflected in the amount of service fee they charge. “Transferring cost to Ethiopia is high because the oligopolistic nature of the business has given leverage for the top operators to determine price,” says Habtamu Workneh, Director of External Economic Analysis and International Relations at the NBE.

According to the NBE, sending USD200 from the United Kingdom to Ethiopia costs 9.43Pct of the amount sent while it is 8Pct from Italy, 5.75Pct from USA and 5.1Pct from Saudi Arabia. “Ethiopians in Diaspora pay additional USD10.5 on average, in order to send USD200 to their loved ones back home. This is too much for the Ethiopian Diaspora who are mostly students and paid employees that send small amount of money,” argues Habtamu.
The World Bank indicates that transaction cost (the fee to be paid by the sender) plays a significant role in determining the channel chosen to send remittance home by the migrant. “The Diaspora can simply send money using operators’ online platform from their credit cards or digital accounts. However, the fee is high. In addition, not all Diaspora are aware of these platforms or have accounts because many migrated illegally,” explains Michael.
Pushing and pulling factors towards informal channels

The high service fee paved the way for the emergence of a large informal sector. There are, however, other factors which contributed to the expansion of illegal channels. A considerable section of the Ethiopian Diaspora live illegally in their host countries and, therefore, have no bank accounts. These undocumented migrants have no choice but to turn to informal money transferring channels. “Since the majority of migrants from Ethiopia live illegally in host countries, they can’t access and use formal channels to send money back home. This means, all the money sent by this portion of the diaspora community is channeled illegally,” explains Habtamu.

Many Ethiopian migrants living in the Middle East and South Africa do not have legal status. Some estimates put the percentage of undocumented migrants at 65Pct of the total Ethiopian population living abroad. Estimating informal flows into Ethiopia is extremely difficult.

Insiders say anybody who has the connection can transfer remittance to Ethiopia illegally. As a result, the number of illegal remittance channels exceeds the legal operators with license. “Illegal money transferring channels have wide coverage and are more innovative than legal operators,” notes Michael.

Not only illegal migrants are, however, drawn into illegal channels. Legal residents are also attracted by the high exchange rate the parallel market offers. “The higher exchange rate offered in the black market attracts both senders and recipients to transfer through the illegal agent,” says Michael. “Nobody gives you an additional eight birr to the dollar, except for the parallel market.”

According to insiders, informal channels offer more benefits both to the senders and receivers. Illegal agents save the sender the high service fee charged by legal operators. The receiver also gains additional money from the higher exchange rate offered by illegal agents.

Boosting Remittance Thru’ Formal Channels
There is a significant range between the parallel and the official exchange rates. Although the parallel premium came down from its 35Pct range with the official in November 2019, the exchange rate it offers is still 27Pct higher.
Ahmed Hassen, Vice President for Corporate Banking at Cooperative Bank of Oromia (CBO), stressed that the government can encourage remittance flow through legal channels by narrowing the exchange rate difference in the formal and parallel markets. Ahmed went on to say: “People who channel remittance illegally are likely to join the formal sector, if the official exchange rate can offer better profit than the parallel market.”

Tekei Alemu (PhD), Senior Economics Lecturer at Addis Ababa University (AAU), agrees. He pointed out that reforms taken at macro level are essential to solve the problem. He stated: “Ethiopia must liberalize the exchange rate regime and legalize black market operators in order to divert the remittance going through informal channels into the offical one.”

NBE has been taking various measures to bridge the exchange rate difference between the official and parallel markets. Reducing the parallel premium through massive and successive devaluation of the birr and the introduction of auction exchange rate systems constitute the main measures taken in this regard. On the other hand, police has been raiding black market operators. However, none of the measures have fruitfully bridged the gap.

At policy level, no concrete step has been taken so far, although the government announced months ago that it would liberalize the exchange rate regime as a condition to access three billion dollars in three years from the International Monetary Fund (IMF). Accordingly, the NBE has started conducting a study to determine how and when to liberalize the exchange rate regime. “The study would determine whether the exchange rate regime should be liberalized totally or in some extent,” explained Habtamu.

In line with the homegrown economic reform agenda of Prime Minister Abiy Ahmed’s (PhD) administration, the NBE is currently revising all of the legal frameworks that are related to the issue. “The reform is also expected to allow microfinance institutions undertake remittance services, because they have wide coverage,” adds Habtamu.

Experts, however, stress that it is not only macro level reforms that can be a cure. Rather, measures should be taken sectorwise. One of the measures is introducing various incentive packages to encourage remittance senders and receivers use legal channels. “The government can introduce incentive packages for the Diaspora community. For instance, the government can put aside a certain amout from every USD100 sent from the Diaspora in Saudi Arabia. The money can then be used to ease and facilitate the working conditions of migrants residing in Saudi Arabia,” argues Ahmed. Another instance he pointed out was that deductions from a significant amount of remittance sent to a specific area can be used by the government to build health centers, schools, water supply or any other infrastructure in the area. Such measures might encourage residents of such areas prefer formal channels.

Ahmed argues encouraging and incentivizing money transfer operators is also necessary. CBO recently awarded top remittance agents because substantial amount of remittance is channeled to Ethiopia through them. Although the service fee is high, Ahmed argued, they are doing a crucial job channeling foreign exchange into the country and they deserve encouragement for that effort.

The other measure that should be taken by commercial banks operating in Ethiopia is to create more correspondent banking relationships and bilateral key exchange arrangements with banks operating in different parts of the globe. Experts argue this can boost the remittance sent via SWIFT network. Local banks have few correspondent bank agreements with other financial institutions abroad. This should be improved in order to increase the amount of remittance sent using SWIFT.

Habtamu pointed out the government is also analysing the option of allowing Ethiopian banks open branches abroad. The state owned Commercial Bank of Ethiopia (CBE) is the only bank allowed thus far to open branches outside of the country. EBR

9th Year • Apr.16 – May.15 2020 • No. 85