“Black Market” or Open Air Market Money Changers?

March 19, 2008

Addisu Tadesse

I have read the news about the Federal Police surprise raid of unlicensed forex (foreign currency exchange) shops around Addis Ababa on Addis Fortune.

Though I have not read any legal text books, their activity as currency converters is probably illegal and may be those people who had been running foreign currency shops are breaking the law, but is that a complete picture of the reality on the ground? What about businesses and hotels charging in dollars? Are they also breaking the law and do they have to report to Federal police?

Though it may appear morally indefensible, I am going to raise an argument in favour of either licensing them to operate legally or keeping a blind eye to the black market to keep the economy running. Why?

First, black market is a reflection of a command economy. Thomas M. Leonard writes “A vibrant and flourishing black-market economy can also be a symptom of dysfunctional domestic polices. Frequently, the presence of a prosperous underground economy is a consequence of existing economic policies, such as tax or regulatory regimes, that are overly burdensome or oppressive or that just fail to properly address economy reality”

In plain language, if the people could not find what they want from government shops or by legal means, they are prepared to pay extra to get it through the black-market. So black market is more of a symptom of a wrong economy, not a cause of it. In fact, the problem is that, no other country has ever succeeded to eradicate the black-market by raiding it. Not even the mighty Soviet Union with all its KGB spying network and China with its Red Army and death penalty could stop the black market. Instead, they try to beat the black-market by liberalizing the currency market. As the saying goes, if you can not beat them, join them. When carrying dollars was dangerous, Russians used to batter American Jeans with TV and ceramics wears. It is to be remembered that it was a lucrative business even for Ethiopian students in the Soviet Union and Eastern blocks.

Second, dollar has been exchanged openly around Gandhi hospital and it had never been considered as a crime in the last two decades, including in the last few years of Colonel Mengistu. It was as open as it could be like selling cappuccino and cake. It is also good to put into perspective that TPLF offices abroad had been operating as money transfer kiosks for thousands of Ethiopians in the last 16 years. So what has changed now?

Third, contrary to what has been claimed, these unofficial shops have been benefactors to the economy than causing problems. When I visited Ethiopia three years ago, the difference between the government banks and “black market” was insignificant and it is still the case (5 to 10%). That happened because money was exchanged openly and there was no incentive to go to the black market. So I changed most of my cash at Dashen Banks and at Hilton Hotel rather than going into the open market near Gandhi hospital. In fact, I was pleased to know that I could use my credit cards to take cash from Dashen Bank. On my last year trip, I didn’t carry a lot of cash with me since I thought I didn’t know how much I needed and I could get it using my card when I wanted Birr. I did it because I didn’t feel that I was getting a bad deal compared to the open market exchange rate. In all honesty, I didn’t spend as much as my last trip because I was not in obligation to take more cash just in case to end up spending it all or give it away.

So the presence of dollar in small shops around Gandhi hospital was very useful for the government in stabilising the market and to reassure visitors that they are not ripped off in the government artificially fixed exchange rate. If the government becomes heavy handed to make it illegal, I am sure there will be underground exchanges, probably at much higher value than just 20 or 50 cents difference between the open market and government banks. Probably in a few days time the black-market value of dollar will double as the trade goes underground and when risk is factored into the exchange. In a month or two, I wouldn’t be surprised if a dollar is being exchanged at least 50% more than the official exchange rate to push more people into underground world.

It is simple human psychology. What has happened would create a sense of scarcity for people to stock dollar, use every available opportunity to go to National Bank under various legal travel plans to buy dollar and sell it in black-market. That was exactly what was happening in early days of Colonel Mengistu. Despite the harsh penalty, it had never stopped the people from bringing dollar into the country and selling it at a much higher value. So this sudden raid of these most important markets is going to hurt the government than the traders. Of course, those who were caught with large sum of money are going to feel the pain but the underground world would reap the benefit.

In my view, it is a misguided action by someone who has no understanding of the role of a black market for the stability of the economy. Black-market is an important part of economic stability and progress. USA and European countries benefit tremendously from black-market cheap labour. They know there are millions of Mexicans, Africans, Asians working in their farms and factories but they keep blind eye to keep cost down and become competitive on global market. As an example, California loses between 60 to 140 billion dollar in black market labour, but it still gives blind eye to millions of Mexican farm workers because about 2/3 of their income earned in the shadow economy is immediately spent in the official economy resulting in a considerable positive stimulus effect on the official economy.

The easy solution for Ethiopia was to join them by licensing forex spots so that people could freely exchange dollar at market value than imposed by someone. If this market shuts, thousands of people who have to travel abroad for medical treatment, education, trade fairs, holiday or other small scale business have to queue at the national bank demanding for dollar. Whether the government likes it or not, now it will be the duty of the government to provide dollars to people who has to travel abroad draining the national bank foreign exchange reserve.

This will be unintended consequence of the raid.


4 comments on ““Black Market” or Open Air Market Money Changers?

  1. I agree handling of the money changers case is a delicate matter for we don’t exactly know the repercussions. Additionally confiscating their money without prior warning or giving them a deadline is not a right thing.

  2. Addisu, it is interesting perspective and I didn’t see the black market from your perspective. Gradual deregulation of the currency market is a better way of killing the black market than pushing it into underground world to distort the exchange rate. Let’s do a simple arithmetic.

    Everyday few thousand people have to leave the country through Bole Airport to Europe, US, Africa, India and China for business or pleasure. Ethiopians travelling abroad cannot use Birr abroad or cannot go to Dech-Selama (church) to sleep. They have to sleep in Hotels and eat at restaurants. So they have to get dollar from the National Bank or the black-market. Say, if the National Bank rations 500 dollars per travel per person one can easily multiply it by at list 1000 people leaving the country. That means the National Bank is expected to handover at list 500,000 dollars per day travelling abroad or tell them to stay at home. Where the National Bank is going to get this money?. The choice is either the people have to stop flying bringing the airlines and other supporting industries with them or they have to go in to underground to buy dollar at much higher price. That is why I agree with Addisu’s proposal of legalisation of the money market. It is a win win condition. The government would collect tax while the people could travel abroad looking for business opportunity or pleasure without demanding dollars from the national bank. Ethiopia must not make a mistake what Issaya’s Afeworki did in Eritrea.

  3. Well put! That’s my sentiment exactly.

    The way I look at it the Ethiopian currency is doomed and the more they try to regulated the faster the birr will depreciate. To top it off, the National Bank of Ethiopia released a warning on national media that there is a large amount of counterfeit birr in circulation and for the public to pay attention. I call that a perfect storm. I feel sorry for the poor.

  4. I’m afraid that this money changing business is being handled by ethiopians in general. Woyane has lost the control of it.
    Don’t you think so !!!!

Comments are closed