For Ethiopia-based businesses that require imported goods or materials, accessing hard currency through the banking system is one of the biggest challenges they face
Published on: 01/12/2020
This article was written by Eline Bakker and Peter Feldman
updated and revised on 13/01/2022
In a series of posts, we will present the main challenges that businesses face when expanding their range of WASH products and services available for purchase by households in Ethiopia. After describing these challenges, we will recommend specific regulatory and policy actions to address them and to improve the overall business climate in the country. The ultimate aim is for enterprises to start up more easily, grow, and serve their communities sustainably.
This first of eight articles addresses issues related to access to foreign exchange for WASH-related businesses in Ethiopia.
Currently, only nine percent of Ethiopians have access to basic sanitation services – a serious situation that affects public health, education, and many other aspects of the country's economic and social well-being (JMP, 2020). Achieving universal access to basic WASH facilities cannot be done by government or NGOs alone; it will require a strong contribution from the country's private sector. The Government of Ethiopia recognizes this and is working to strengthen private sector businesses that offer WASH products and services (including household sanitation) as a key element of its greater focus on hygiene and environmental health (FMoH, 2016). These measures are necessary because the current market only meets a small fraction of the country's enormous needs.
To gain insight into how these challenges can be addressed, and to do so in a manner that ensures the solutions are affordable to all, the USAID Transform WASH team spoke with a wide range of experts – including business owners, government officials, and technical specialists in Ethiopia and other East African countries – to get their advice and recommendations on how to develop and expand Ethiopia's WASH market. The post that follows is largely based on these experts' reflections.
To explore this topic in more depth, follow this link to the Learning Note.
Ethiopia-based enterprises often need to purchase and import equipment, raw materials, and finished goods for their operations. To do so, the company must first convert their funds from Ethiopian Birr (ETB) to a "hard" currency through the Ethiopian foreign exchange market. Since the country imports significantly more goods than it exports (US$ 20 billion in imports vs. US$ 7.6 billion in exports in 2019), the demand for foreign exchange (Forex) currency outstrips supply. The situation has been exacerbated by Ethiopian government exchange rates, which have overvalued the ETB, according to the World Bank (2017), creating an acute shortage of foreign currency.
The government devalued the ETB by 15 percent in 2017, and the currency has continued to depreciate since then. Analysts predict that the ETB will continue to be subject to "managed devaluation" to levels closer to free-market rates over time to encourage more foreign investment and to help address the country's trade imbalance (World Bank, 2017). However, the immediate effect of ETB devaluation on importers is that they must use an ever-increasing amount of Ethiopian currency to obtain the same amount of Forex, effectively increasing the cost of imports and decreasing the price of exports to international buyers.
For businesses that require imported goods or materials, accessing Forex through the Ethiopian banking system is often identified as their biggest challenge, as some sectors and businesses are prioritized over others. A 2018 commentary in the Ethiopian Business Review noted that "all transactions requiring foreign exchange are not created equal."
Forex is tightly controlled within the national banking system, and a large amount of its allocation is earmarked for government infrastructure projects, such as the Grand Ethiopian Renaissance Dam and others. Thirty percent of Forex coming into commercial banks is transferred to the Central Bank of Ethiopia (CBE), which earmarks it for purchase of strategic materials, such as fossil fuels. The remaining Forex is then allocated to fulfill business requests in accordance with prioritization rules. Bank "allocation committees" are responsible for matching available Forex with submitted applications. Prioritization tends to follow a basic system:
Forex requests from non-strategic businesses or for "non-essential" purposes, therefore, are queued and must wait their turn for available funds. Businesses, including those offering WASH products, often wait many months to obtain Forex, and they typically do not know whether or when their allocation will become available. When businesses do receive a Forex allocation, they may be required to use it quickly (i.e., within a 14-day window), and they may not receive the total amount requested. These Forex access challenges affect a business's ability to respond to orders, expand operations, maintain positive business relationships (e.g., making payments on time) and to remain competitive. Some businesses operate at a fraction of their production capacity due to the shortage of Forex and system of allocation.
The following actions are recommended to help alleviate Forex-related obstacles to the success and growth of businesses that offer WASH products and services in Ethiopia: