By Beatrice Pauline Otieno
The government of Ethiopia has ended the importation of commercial goods using the Franco Valuta System, barely two months after signing an agreement to allow the country to solve its foreign currency deficiency and inflation.
The Minister of Finance Ahmed Shide, in a letter directed to the Ethiopian Custom Commission and the National Bank of Ethiopia, indicated immediate abolishment of the system. Importers are given two weeks to conclude pending customs transactions. The document also indicated the commercial Bank would begin the distribution of foreign currency to importers.
The decision affects importers and exporters who initially were permitted to import oil and food products under the system. Other items such as vehicles and weapons were not allowed under the Franco Valuta arrangement.
In the letter, the government noted that Franco Valuta’s plan had helped the country stabilize prices during inflation, stating traders have also been able to import essential goods during the crisis phase. The ministry said Franco Valuta had significantly helped curb the inflation rate and that the system’s use was a temporary solution.
Earlier this year, the Ministry of Finance allowed the importation of certain goods using the Franco Valuta System as a macroeconomic reform strategy. In the past five years, the government has implemented some changes to reform the country’s economy, however, some strategies have succeeded while some have failed to work.
The decision to end the Franco Valuta system is based on the view that Banks in Ethiopia are now in a position to make foreign currency available for exporters.
The system was introduced in the country in April 2022 lifting foreign exchange permit as a condition to import items with a threshold of $250,000. Wheat, rice, sugar, edible oils, and instant baby milk were among products that were allowed under the system.
It was introduced amid shortage of essential food commodities and rising inflation in the country. However, the inflation only got worse in the country after the macro-economic reform measure the government announced in July of this year allowing a market-based foreign currency exchange regime.
Franco Valuta System Background
Franco Valuta has been employed by many countries to deal with foreign currency shortages and curb inflation. It works by allowing importers to evade the traditional foreign currency regulations, allowing them to use personal foreign exchange. This system grants importers to bring goods and exporters with tax holidays without license restrictions.
It is the first time Ethiopia has resorted to the practice to deal with currency shortage. In 1974 when the military took power, it said that its policies led to a currency shortage making the country resort to the arrangement as a short-range method to overcome economic afflictions. Other instances happened in 1990 and 2021 when Franco Valuta was used to import equipment and essential commodities such as sugar, wheat, rice, oil, and others.
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Good job Patriot H.E. Ahmed Shide!!! Macro and micro economics are in his born-with blood. What a treasure and gift this over qualified finance guru is to that gem of the colored called Ethiopia!!! I can tell how these finance giants like IMF and The World Bank can not wait until they have him in their bags. He would be a vital asset to any financial outfit.
Go get’em tiger!!!!
Other countries have gone through the foreign currency crunch at certain time during their development. Almost every Western European and Asian country we see now well developed had the same problem. For almost all Western European countries, Good Ole USA had to come to the rescue and it did the same for Asian nations whose economy was based on market. But I remember when one of them, my darling Taiwan, faced the crunch head on. I and my employer did play a tiny part in coming around with the crunch beginning the mid 1980’s. We came up with a legit plan to buy the raw materials they needed to manufacture our products from their South American sources. We bought the raw materials they needed and we get full credit of what we spent from the price of the products they made for us. We called the transaction ‘tolling’. It worked like a charm. But it did not take too long for those genius Taiwanese finance officials to successfully tackle the crunch.
Once again, hats off to this genius of our own, Brother H.E. Ahmed Shide.