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A casual trek along Namibia Street,
between Atlas Hotel and the Ring Road, reveals how
much this neighbourhood has changed from an upscale
residential area into a budding business district,
within a mere decade. On both sides of the road,
which Chinese construction firms managed to complete
in 90 days, are businesses from hotels to kids’
stores, from liquor stores to night clubs, from
restaurants to cinemas, and from shopping malls to
banks.
Rental fees in this neighbourhood
are known to be some of the highest in the city. One
woman, a mother of three, has a one-storey modern
villa up for rent. Lying on a 500sqm plot alongside
the main road near the branch office of ethio
telecom, a.k.a. Tele Bole, the villa incorporates
four bedrooms, a large living room (with a dining
room extension) as well as three bathrooms. It also
takes pride in having a modest garden and service
quarters behind the main house.
Previously rented out to foreigners
paying the 64,000 Br monthly rent in euros, this
typical house of the neighbourhood is again
available for rent. But, the landlady, whose
identity Fortune is keeping anonymous do to
approaching her undercover, has a special request,
should a prospective tenant agree to rent the house.
Not only ought the tenant pay the
rental fees in advance for a year, which has become
a common practice among the majority of upscale
landlords across the city, the rental contract has a
provision that explicitly states the rent amount in
dollars, instead of in the country’s legal tender,
Birr.
Hoping to rent it out for 4,000
dollars, the landlady plans to pay the us college
fees of her two children. Neither was she willing to
let this amount, incorporated in the rental
agreement, be authenticated with the Documents
Authentication & Registration Office (DARO), for
fear of letting the tax authorities know about the
true nature of the transactions.
Her interest in setting the rental
fees in foreign currency is an emerging trend among
homeowners and real estate companies, who prefer to
quote prices in dollars and euros, hoping to fend
off potential losses due to sudden changes in the
foreign currency regime of the Birr. Even though
many of them still use Birr as the currency of their
transactions, they avoid using the actual value of
the local currency. When contracts are drafted,
prices are set mostly in dollars to be paid
periodically in Birr, using the exchange rate on the
day of payment.
Though this may not be seen in
day-to-day transactions, such practices have become
common place when drafting rental contracts in which
tenants promise to pay their rent in an amount
equivalent to the dollar amount that they agreed to
with the landlord.
This is what economists describe as
a “dollarisation of the economy.” Although in varied
types and not like the full dollarisation of an
economy described by Andrew Berg and Eduardo
Borensztein, both senior staff members at the IMF,
some succumb to it by holding deposits in foreign
currency due to the uncertain record of the local
currency, while others see it as an instrument to
hedge against the inflation of the domestic currency
policy.
A website dedicated to serve the
needs of investors, investopedia.com, defines the
concept of the dollarisation of an economy as a
situation where “citizens of a country officially or
unofficially use a foreign currency as legal tender
for conducting transactions.”
That is because of the greater
stability in the value of the foreign currency over
the domestic, which has been what Birr has gone
through since 2008.
Aiming at encouraging exports and
improving the balance of payments of the country,
Sufian Ahmed, minister of Finance & Economic
Development (MoFED) once said that it would never
stabilise in his lifetime. The administration of
Prime Minister Meles Zenawi has made successive
devaluations of the Birr against a basket of major
foreign currencies beginning in October 2008.
If the devaluation of the Birr by
10pc was a bit of a shock to the market then, there
were more in store for the subsequent years. The
value of the Birr was further devalued by five per
cent in January 2009, and followed by yet another
15pc within seven months.
Nonetheless, the hard pill that the
economy was made to swallow came in September 2010,
after the macroeconomic team, chaired by the prime
minister, decided to devalue the Birr by a
staggering 20pc.
Most brokers in the housing market
recall that this informal dollarisation came to the
scene, fully, after the largest and last jump.
“The trend started to become
prevalent when the exchange rate of the dollar went
above 16.5 Br, overnight,” a broker told Fortune.
One of such tenants who recently
dealt with the many brokers was Yonas Abebe, a
married father of one. He was taken by surprise when
asked to pay his rent in dollars, after
contemplating to move from his current house, as the
landlords needed the house back where his family had
lived for the past two years.
Yonas finally found a villa in Bole
District with three bedrooms, two bathrooms, a
kitchen, and a compound. However, in negotiating
rental fees with the owner, he was asked to pay the
equivalent of 1,500 dollars, whenever making
payments.
“I have never experienced such a
thing,” Yonas, who was changing his residence for
the second time told Fortune in amazement. “It is
not legal, I thought.”
Whether or not such a practice is
legal, there appears to be no one to speak out on
the issue with authority. It is as much ambiguous to
officials at National Bank of Ethiopia (NBE), whose
mandate includes monitoring monetary policies, as it
is for legal experts in the country.
“The Bank does not have the legal
grounds to limit individuals’ rights to determine
the value of their contracts or the currency they
quote, unless their contract explicitly provides for
the actual transfer of the actual [foreign]bills,”
Alemayehu Alemu Kebede, spokesperson of the central
bank, told Fortune.
Legal documents do not state the
illegality of the act, some of the legal experts who
privately practise law boldly state. Recognising the
effect of such a practice on the country’s economy,
Birhanu Taye, a legal attorney who has a licence to
appear before federal courts, argues that there is
no legal provision that clearly criminalises the
act.
“This is left to the contracting
parties,” he told Fortune. “They can set the price
in whichever currency they chose, as long as they
are actually not transacting with the [foreign]
bills themselves.”
Indeed, the nation’s Civil Code of
the 1960s, which still governs contracts, supports
this. Where a debtor is to pay a debt in a currency
that is not legal tender at the place of payment,
the amount can be paid in local currency at the rate
of exchange on the day of payment, according to the
provision of the law.
When it comes to actual transactions
in foreign exchange, however, the central bank has a
clear mandate to control it. It is the only federal
agency authorised to issue permits for individuals
as well as institutions to transact in foreign
currency, including Ethiopian Airlines, tour
operators, and hotels.
Despite the differing opinions on
the legality of the act, though, landlords who use
dollar values for quotations are bold enough to
state this clearly in their contracts with tenants.
However, some of them are wary to present their
contracts to the relevant government entity for the
purpose of authenticating contracts. Most contracts
are finalised with the contracting parties and
witnesses of both sides without passing through
federal or regional agencies.
“I have not encountered any legal
problems when doing this,” the landlady, with the
one-storey villa available for rent on Namibian
Street, told Fortune.
Nonetheless, while legal experts and
tenants make differing arguments over the legality,
macroeconomic experts are worried about the
long-term effect of the dollarisation of the
economy.
Calling the recent practice an
informal dollarisation, where citizens are using a
foreign currency as a tender for conducting
transactions, the experts argue that this is a bad
sign for the economy.
“This is an indication that citizens
have lost confidence in the local currency,” a
macroeconomist told Fortune.
This growing tendency to transact in
foreign currencies is attributed to the different
physical policy measures that the administration has
taken, bringing double-digit inflation to the
economy, according to experts.
“Such informal dollarisation is a
response to economic instability, high inflation,
and the desire of residents to diversify and protect
their assets from the risks of the devaluation of
their currencies, wrote Berg and Borensztein in
their paper, Full Dollarisation: Pros and Cons,
posted on the IMF website in December 2000.
Inflation, largely fuelled by
state-driven economic expansion, has been the
scourge of Ethiopia since 2006. The consumer price
index (CPI) registered a peak of 40.6pc in August
2011, earning the country a name, second only to
Belarus in the world, for having the highest
inflation rate. Although it subsided to 38pc in
November 2011 and 32pc in January 2012, it has
remained the Achilles heel of the administration of
Prime Minister Meles in achieving a macroeconomic
policy objective of taming inflation to single
digits.
Not even his administration’s
ill-advised policy of imposing price caps on basic
food and non-food items back in October 2010 fared
well. This resulted in a shortage of capped items,
which again led to speculations.
“All of these factors reduced the
purchasing power of the local currency in a
relatively short amount of time,” the
macroeconomist, who wanted to remain anonymous,
said.
Indeed, landlords and other
businesses resort to keeping their savings in hard
currencies, using available means to get around the
law.
This was raised as the main reason
that a landlord, who is looking for a potential
tenant renting his new two-storey villa, requires
being paid in dollars and in advance for three
months.
Located in Saris area by a roadside,
the house was built on a 200sqm plot, after a shanty
house there was demolished. It has four bedrooms,
with three bathrooms, and a modern kitchen, with all
rooms covered with wooden floors. With no compound
incorporated, the house has a garage that can
accommodate only one vehicle. A returnee from
residence abroad for many years, the owner of this
house demands 3,500 dollars in monthly rent.
“Since the cost of living is
increasing everyday, I cannot make contracts in Birr
for a loss,” he told Fortune. “Even if I peg it with
the highest value of Birr for two years, it is
obvious that the purchasing power of the local
currency will decline.”
Sharing the concerns of this
landlord, however, the macroeconomic expert fears
that this practice has the potential to spread to
other segments of the economy, eventually.
“A dollarising country relinquishes
any possibility of having an autonomous monetary and
exchange rate policy, including the use of central
bank credit to provide liquidity support to its
banking system in emergencies,” says Berg and
Borensztein.
There are experts, however, who
argue that such a phenomenon developing in Ethiopia
cannot always be considered a bad sign but rather a
symptom that shows that the country’s trade is
integrated with other countries of the world.
“A country cannot avoid such a trend
if its trade with other countries is increasing,”
said the anonymous macroeconomist.
Neither do Berg and Borensztein
dismiss the possibility of having some benefits in
the dollarisation of an economy, although they see
the possibility of nations resisting the idea on
political grounds.
“A closer integration with both the
global and US economies would follow from lower
transaction costs and assured stability of prices in
dollar terms,” they argue. “Rejecting the
possibility of inflationary finance through
dollarisation, countries might also strengthen their
financial institutions and create positive sentiment
toward investment, both local and international.”
Officials at the central bank,
however, are not bold enough to comment on the
practice’s effect on the economy, claiming that it
needs further investigation.
“It is difficult to state the effect
before conducting a detailed study,” Alemayehu
said.
While economists argue and try to
make their points in economic terms, brokers who are
accustomed with the unofficial dollarisation, on the
other hand, argue that the practice will continue
until the supply of houses brings the demand down.
Homeowners know that there is a shortage in housing,
according to a broker.
“They are confident in setting
rental prices in whatever currency they want to,”
the broker told Fortune.
Over the past decade, the population
of the capital has shown a significant growth from
2.5 million inhabitants in 2001, to around 3.2
million people, today. The housing units in the city
numbered only 628,986, according data from the
Central Statistical Authority (CSA), released in
2009. This came to five persons for each house.
The number of housing units has only
shown a 4.3pc increase since 2001, while the
population size has shown a swift jump of 28pc.
Additionally, the size of the population is too
small to absorb the demand of the unofficial
dollarisation if the administration remains
inactive. |
