Understanding Ethiopia’s regulatory context.

Twice a week I take Amharic lessons with a local professor (let’s call him Abel) on a platform called Italki. 

After class, I asked Abel about his process for withdrawing funds from the platform. This is when the fun begins 🙃 

Here's the breakdown:

1. Withdraw money to Wise account using Payoneer. 

2. Convert Dollars to USDT through Binance.

3. Find a buyer on Binance's P2P platform to exchange USDT for Ethiopian Birr

4. Once a deal is made, transfer the USDT and receive Ethiopian Birr in his Ethiopian bank account.

The surprising part is the discrepancy between the official exchange rate and the true rate in the black market.

I posted about this on LinkedIn, an Ethiopian entrepreneur sent me a voice message to explain a bit more.

What she was essentially saying is that there are some regulations about the amount of foreign currency an Ethiopian can hold, and someone has to justify why they need to get foreign currency when going through the bank.

I like to get to the bottom of things, so I did some digging. I came across an official document from the National Bank of Ethiopia explaining the rules.

Here are some interesting points:

• A person residing in Ethiopia must convert or deposit any foreign currency carried into the country at an authorized forex bureau or into their foreign currency savings account within 30 days of entry.

• A person residing in Ethiopia is allowed to travel abroad with foreign currency if they present a bank advice issued for the purchase of the foreign currency within thirty (30) days from the date of the bank advice.

• It is prohibited to undertake any transaction in other foreign currency in the territory of Ethiopia.

The document is pretty short (8 pages) but the points are clear: it sets strict limits on the holding and conversion of Birr and foreign currency within Ethiopia, outlines the requirements for customs declarations, and details the penalties for non-compliance.

These measures aim to control inflation, support the local currency, and ensure foreign currency availability for essential imports.

The question now is: how do people actually navigate those restrictions to do business 👀?

The Birr Black Market 🐺

When people cannot obtain foreign currency through official channels, they turn to the black market.

Because I’m a geek like many readers here, I’ll try to model the economic phenomena behind with a formula 🤓.

#factors
inflation_factor = 1 + inflation_rate
#This factor accounts for the annual inflation rate #in Ethiopia. Higher inflation erodes the value of #the local currency, increasing the premium as people #seek to convert their currency to a more stable #foreign currency like the USD.

confidence_factor = 1 - economic_confidence
# confidence_factor is between 0 to 1
#Economic confidence reflects trust in the local #economy and currency stability. Lower confidence factor leads to a higher premium as people lose #trust in the local currency and prefer holding USD.

regulation_factor = 1 - regulatory_stringency
# regulatory_stringency is between 0 (complete control) to 1 (no regulation)
#This factor captures the effectiveness and #stringency of currency controls. Weaker regulation #factor allows more black market activity, increasing #the premium.

# premium formula
premium = official_rate ×(supply_demand_ratio 
× inflation_factor
× confidence_factor 
× regulation_factor)

# black market rate
black_market_rate = official_rate + premium

The formula essentially captures the key concept explaining a thriving black market: control over currency exchange + high inflation + instability + high supply-demand ratio.

The inflation rate was 30% in 2023. To put that in perspective it is about 4.1% in the US or Europe for that same period. The official interest rate when you put your money in the bank is 7%.

That means that a company leaving their money in Birr at the bank would have a real interest rate of 7%−30%=−23%. A negative real interest rate means that the value of money is decreasing in real terms.

One struggle that companies operating in Ethiopia might also encounter is to take theirs profits out of the country (for example if it’s s subsidiary company).

Fo instance, if you have your tech team in Lisbon and operations in Ethiopia, you might have issues converting your Birr to Euros to pay your tech team.

If you want to go deeper about how black market actually operates, here is a great article.