This paper provides a brief analysis of the financial trading situation prevailing in Ethiopia. The paper deals with issues that Trade Financing activities must know about. The general economic situation of Ethiopia and the risks prevalent in trading with Ethiopian customers is discussed in the essay below. The essay also talks about some of the methods by which the risks of trading and financing trade can be mitigated when dealing with Ethiopian counterparts. Ethiopia, a predominantly agricultural economy, started the quest for development around a decade ago.
This African country has a very low per capita income and very low levels of health, education and nutrition. For Ethiopia, trade integration into global economy means to exploit the diverse resource base and potential. Country’s integration into multilateral trade system requires study of both supply and demand factors that enhance its competitiveness. In order to evaluate the trade issues, a thorough understanding of the domestic demand and supply is essential.
The Foreign Direct Investment, Legal and regulatory environment must support higher levels of investment and savings to be able to increase the current 5 % GDP to at least 8% in order to address poverty issues on sustained basis. The political situation in Ethiopia is not very conducive for carrying out trade, especially as a foreign trader. Ethiopia has been dealing with the resurrection of a number of armed groups which threaten to pull the already fragile government into conflicts. These issues have further weakened the government’s efforts to bring about a stable banking system in the country.
The banking system is primarily government owned and hence any destabilization in the government may also result in destabilizing the banking system. This does not help trade financing, as any trader would be wary of selling goods to a customer whose letter of credit or bank guarantees may not be rock solid. In the recent years, Ethiopia has been undertaking various economic reforms and has adopted some market oriented economic policies. These improvements have resulted in a consistent growth for the last six years and have improved the countries foreign exchange revenue.
It is now in a position to finance its import bills for at least six months (Forbes Global Magazine, 1999). The macro economic scenario, though encouraging, still does not give enough confidence and hence it becomes difficult to finance any trade deal or capital intensive projects which have a longer payback period. The country rating of Ethiopia is C, which means that the economic outlook and business environment does not guarantee a payback for the financing of trade and corporate projects (Tradingsafely. com, 2008).
Ethiopia’s currency follows a managed floating path with no pre-announced path for exchange rate. This means that the government’s monetary authority influences the exchange rate by actively intervening in the market (mof. go. jp, 2008). This kind of managed exchange rate presents problems for the trade financer as the exchange rate at which the money is to be paid by the customer is not guaranteed and hence any steep upward revision of the currency due to government intervention may result in getting lesser amount than the financier is expecting (Businesslink. gov, 2008).
It may be very difficult to acquire credit worthiness data of the potential buyers in Ethiopia because the banking system is not wide-spread. There are virtually no private banking companies and hence any data that a trade financier may receive will be government regulated and may not be a true picture. Getting paid for any trade of goods or supplies is not very easy in Ethiopia. There are not many large credit worthy banking institutions so any kind of Banker’s cheque or international money orders are not easy to come by. The best way to receive payments in Ethiopia is to have the money deposited in the sellers account by the buyer.
The problem in this method of accepting payment is that the seller has to have an account in Ethiopia and getting the entire amount to the financier’s own country is again dependent on the exchange rate fluctuations. The transfer of money from Ethiopian bank account to foreign bank account is also regulated, though some of the modern practices such as electronic transfers using SWIFT system is being adopted (bankofAbyssinia. com, 2008). Credit and Debit cards are issued to public in Ethiopia and hence online payments which can be safely routed to the merchant’s accounts using a VISA or a MasterCard kind of gateway is also not possible.
Like with any other country trading with partners based in Ethiopia requires one to do due diligence and evaluate the risks involved. To make sure that the payments regarding the goods and services arrive on time one must adopt the time tested method of buying insurance against any payment default or loss of payment. Insurance is the most effective method of transferring one’s risk. Credit insurance is a major risk management tool and it typically costs range from 0. 35 % to 0. 65 % of the amount insured. To insure against payment defaults by the customers in Ethiopia a banking instrument called documentary credit can be used.
This allows the financier to receive payment as per the established terms and conditions of any deals. The documentary credit must be issued by a well capitalized Ethiopian bank where the buyer has an account. Financiers may also insure timely and correct payment for trade financing by agreeing into a forfeiting agreement with a bank. The bank will buy the entire invoice amount from the financier at a discount. This way the financier’s money is safe and he receives the entire amount minus the discount at which he entered into the agreement with bank.
The entire responsibility of realizing the payment from customer is then with the bank, which will make a profit when the payment comes in from customer (Businesslink. gov, 2008). Ethiopia is Africa’s second most populous country and as such provides great opportunities for growth and trade. There is potential for enhanced trade with the world and this must be exploited with caution. Due diligence must be done in assessing the buyers payment potential and the safe passage of money from Ethiopia to the financier’s bank account must be ensured before any trading activity begins.
In last five years Ethiopia has been on a growth path clocking at least 5% growth annually, this momentum is likely to carry further resulting in more trading contacts with the world, ensuring that these engagements are safe for the financiers will be beneficial for all stake holders. References Ethiopia, @rating, reteived on 7 November, 2008 from http://www. trading-safely. com/ Exchange Rate arrangements of respective countries and regions, retrieved on 7 November 2008 from http://www. mof. go. jp/english/if/if043k. htm.
Information of Ethiopians in the diaspora on BOA services, Bank of Abbysinia, reteived on 7 November, 2008 from http://www. bankofabyssinia. com/Information%20to%20Ethiopians%20in%20the%20Diaspora. htm Making a Stride Economy, Ethiopia, World Investment News, Forbes Global Magazine, July 1999 retrieved on 7 November 2008 from http://www. winne. com/ethiopia/cr00. html SITPRO, Simplifying International Trade, Managing the risks of International Trade Advice retrieved on 7 November 2008 from http://www. sitpro. org. uk/trade/managingrisk. html