VZCZCXRO6796
RR RUEHROV
DE RUEHDS #0753 0771237
ZNR UUUUU ZZH
R 171237Z MAR 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 9965
INFO RUCNIAD/IGAD COLLECTIVE

UNCLAS ADDIS ABABA 000753 
 
SIPDIS 
 
SIPDIS 
DEPT FOR EEB 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV EFIN ET
SUBJECT: BLACK MARKET BUSTED - FOREIGN EXCHANGE CRACKDOWN 
 
REF: ADDIS ABABA 411 
 
¶1. SUMMARY: Following a period of rapid depreciation in the black 
market exchange rate and a growing gap between official and parallel 
rates, Ethiopian authorities have cracked down on the thriving but 
illegal parallel foreign exchange market in Addis Ababa.  END 
SUMMARY. 
 
¶2. Per reftel, the past few months have seen a dramatic departure 
from typical patterns of exchange rate depreciation and black market 
rates.  Traditionally, the Birr, which is pegged to the US Dollar, 
has been subject to a slowly creeping depreciation managed by the 
National Bank of Ethiopia (NBE), Ethiopia's central bank. 
Additionally, the historic gap between the official and black market 
exchange rates has been insignificant.  In recent months, a variety 
of supply and demand factors in country (see reftel) as well as 
world market trends have hastened depreciation and widened the 
parallel/official gap. 
 
¶3. Until this week, the black market in forex has operated mostly in 
the open in small shops clustered in a few areas of Addis Ababa. 
These shops often operate under the guise of other purposes, often 
as liquor or music stores.  The locations and business purpose of 
the shops were not hidden in any significant sense, and transactions 
took place readily over the counter.  With the growing gap between 
official and black market rates, shop operators felt the heat, which 
led to wide fluctuations in the black market rate- from 10.5 birr 
per USD one day down to 9.5 the next and back up to 10.6 last week. 
 
 
¶4. On Thursday, March 13, Addis Ababa City Police and Ethiopian 
Federal Police raided a reported 26 black market foreign exchange 
shops.  Thirty-five people were arrested and an undisclosed amount 
(reportedly up to $6 million) was seized.  Interestingly, the basket 
of currency included not only the typical hard currencies of U.S. 
Dollar, Euro, and British Pound, but others that indicate Ethiopia's 
trading partners - the Chinese Yuan, Thai Baht, and Emirates 
Dirham. 
 
¶5. Linked with the raids, the Ministry of Trade and Industry revoked 
the permits of merchants to import cement on a franco valuta basis, 
stating that they believe the importers and the black market 
currency exchanges are operating in tandem.  Franco valuta allows 
the import of products using foreign currency that has not been 
officially allocated by the NBE.  Franco valuta imports of cement 
had been permitted earlier to alleviate the country's shortage which 
was hampering ongoing construction efforts. 
 
¶6. COMMENT: This crackdown on the black market is a first since the 
current regime entered power in 1991 and is another indication of 
the country's severe foreign exchange issues.  As import demand 
grows and world prices for key products such as petroleum, grain, 
and fertilizer reach record levels, the Government of Ethiopia is 
struggling to keep sufficient reserves to meet its obligations. 
While export expansion is a way of increasing foreign exchange 
reserves, Ethiopia's import demand is outstripping its export 
earnings. This enforcement effort appears to be driven by a need for 
more foreign currency to make its way into the official coffers of 
the GoE.  Post continues to monitor the exchange rate, both official 
and parallel, and will report on any further developments.  END 
COMMENT. 
 
YAMAMOTO