Ethiopian Business Review

Transacting in the Shade

Wide Spread Contraband Trade Cripples Ethiopia

Contraband , part of the shadow economy, is still a threat to Ethiopia’s economy. But even more, it has recently started to affect the well-being of the nation. The recent violence in the states of Ethio-Somali and Benishangul Gumuz shows the severity of the problem. Items from textiles products to precious metals are traded by contrabandists. This has paved a way for a shadow economy to thrive, raising its contribution to the GDP to as high as 40Pct. EBR’s Ashenafi Endale investigates.

Ever since inter-communal violence started along the border of the states of Oromia and Ethio-Somali in September 2017, the term ‘contraband’ and ‘contrabandists’ have become everyday language among Ethiopians. In fact, the so-called ‘contrabandists’, or people who are involved in illegal cross-border trade, have been accused by government officials of being the ‘origin’ and ‘kindling’ for the violence, conflicts and lawlessness that have been spreading across various areas of the country in recent times. 

 Although the practice of illegal cross-border trade is not new in Ethiopia, its recent climb to new heights, threatening the unity and well being of the nation, is unheard of. While addressing Parliament in March 2017, former Prime Minister Hailemariam Desalegn  admitted that “black market” and “contraband” business was the main cause of the conflict between the states of Oromia and Ethio-Somali. “Both factors have played a significant role in the violence that resulted in the death and displacement of many Ethiopians,” he told members of Parliament. 

According to the UN Office for the Coordination of Humanitarian Affairs, at least 1.1 million people have been displaced by the violence in the states of Oromia and Ethio-Somali as of mid-April 2018. This figure accounts for 40Pct of the 2.8 million internally displaced people currently in Ethiopia. 

Immediately after Abiy Ahmed (PhD) was sworn in as Prime Minister in April 2018, he travelled to Jigjiga, the capital of the state of Ethio-Somali, to resolve the border disputes between the two regional states. “The incident was inappropriate and outside our culture of respect. It made us bow our heads in shame,” Abiy said in Jigjiga before calling on the two regional heads to shake hands in front of the gathering as a sign of their commitment to bring about real reconciliation. 

Despite the handshakes and promises, armed incursions and cross-border raids continue in many parts of the state of Oromia, such as Moyale and most recently in the eastern part of the country, including Jijiga, where much of the violence took place. Once again, government officials, including Lemma Megersa, president of the state of Oromia did not hesitate to point the finger at the so called ‘smugglers’ and ‘contrabandists’ for sponsoring and fueling unrest in different parts of the country since June 2018. Yet no one seems to know the identities of the so-called ‘contrabandists’, including officials of the Ethiopian Revenues and Customs Authority (ERCA).

When Moges Balcha, director-general of ERCA, presented a six-month performance report before Parliament in February 2018, he had nothing to say to MPs who demanded the identities of people involved in the contraband trade. All Moges said was “contraband and illegal trade practices are becoming serious problems.”

Although the identities of those involved is still a mystery, illegal cross border trade is openly practiced in Ethiopia. Since the country is landlocked, products manufactured inside or outside its borders are traded in two ways. Firstly, goods can be traded legally across borders by businesses and individuals that have licenses and pay taxes to the government. The second method involves trading activities carried out contrary to the legal system of a country. In Ethiopia, such illicit cross border transaction takes place with neighboring countries such as Kenya, Sudan, Eritrea, Djibouti, and Somalia.

Hartisheikh, a small town near the border that separates Somaliland and Ethiopia, is a well-known center for contraband trade in east of the country. Items from textiles and TV sets, to precious metals and diamonds enter mainland Ethiopia through Jijiga, according to information obtained from the Ethiopian Revenues and Customs Authority (ERCA). On the other hand, khat and live animals are the main items illegally exported from Ethiopia. 

Biniam Fikru (Col), human resource director at Dire Dawa Police Commission is familiar with the huge contraband transaction undertaking in the eastern part of the country. “The illegal cross border trade between Ethiopia and Somalia is perhaps the highest in terms of volume when compared to other routes of illicit transaction with neighboring countries,” stress Biniam.  “Sometimes I can’t accept the reality before my eyes, even as a police officer. They take very risky actions.” 

According to Adugna Bekele (whose name has been changed to protect his identity), an illegal cross border trader operating via the Ethiopia-Somali route, contrabandists usually deposit their goods in secret chambers in residential houses, the owners of which usually get the first piece of the pie. “Many households in the region have underground bunkers. Although everything seems normal on the surface, illicit transactions take place underneath,” he says. 

Adugna says he exported live animals from the east of the country to agents, explaining, “I used to export up to 16,000 live animals annually via Ethio-Somalia border.”

Humera, a small town in western Ethiopia, serves as the center of contraband trade on the Ethio-Sudan route. Goods smuggled into Ethiopia include electronics, garments, perfumes, cosmetics, pornography, drugs and arms, among others while gold and silver, garments and cosmetics are exported to Sudan. 

“Contrabandists usually use the western border to smuggle in armaments,” says Tesfaye. “They also smuggle out live animals and agricultural products to Sudan via borders.”

The main hub for contraband trade in the south, on the other hand, is Moyale, a border town between Ethiopia and Kenya. The town serves as a transition point for items that comes from Kenya such as TV sets, smart phones, new as well as second hand shoes and leather jackets to reach the central market through Hawassa, the capital of the state of SNNP. Even automobiles are illegally traded through this route. 

There are sometimes gang fights to establish control over the Ethio-Kenya contraband route, according to insiders. “There are a number of gang leaders on each route. They establish links with officers and regional governments. They control who is allowed to trade and even tax contrabandists,” explains Adugna who worked on the route for over ten years.

Walelign Mulugeta, performance evaluation director at the National Planning Commission says contraband trade in Ethiopia ranges from import/export activities to domestic industries. “Industries sell their products off-book, if the raw material is imported or accessed from the informal economy,” he explained.

Although it is difficult to estimate the exact value and volume of items traded illegally, insiders indicate that the items caught by ERCA are only the tip of the iceberg. The products confiscated by the Authority reached one billion birr in 2017/18 

Illegal cross border trading is one segment of the activities hiding from the country’s rules and regulations regarding commerce. The definition of black (shadow) economy plays an important role in assessing the nature and size of contraband trade taking place in a given country. Although no single definition exists, the most precise and predominantly used definition relates the shadow economy with all economic activities which are hidden from official authorities for monetary, regulatory, and institutional reasons. 

A survey conducted by the Central Statistical Authority in 2015 indicates that the size of the black economy is around 20Pct of the gross domestic product (GDP). Yet experts like Alemayehu Geda, a professor of economics at AAU, strongly disagrees. “According to studies conducted by international organizations, the size of the shadow (illegal) economy is up to 40Pct of the GDP,” Alemayehu explains. “In Ethiopia, the official figure prepared by the government does not include many small and medium businesses, which are part of the shadow economy based on internationally accepted standards.”

A report published by the International Monetary Fund in 2018 tends to agree with Alemayehu’s assessment. According to the report, which measures the size of the black economy in 158 countries, the size of the shadow economy in Ethiopia between 1991 and 2015 ranged from a minimum of 34.4Pct to a maximum of 40.7Pct of the GDP.

In most economic literature, one of the major factors for the growth of contraband trade is the high intensity of regulations in a given country. The intensity of regulations can be explained by the existence of discouraging tax rates, customs duties and tough tax policies as well as a high number of laws, regulations and licenses requirements, which decrease economic agents’ freedom of choice.

Experts stress that where barriers exist against bartering and exchanging one thing for another, businesses tend to utilize the available options whether they are lawful or not. “This is why practices like under-invoicing and underground trading are widely used by the private sector in Ethiopia,” argues Tilaye Gete (PhD), research director at Trin International Consultancy. “Improving the business and regulatory environments is essential to minimize these unlawful practices.”

Of course, Ethiopia lags behind in ease of doing business even within sub-Saharan Africa. While it takes 166 hours finalize customs clearance and inspections to import items into Ethiopia, the sub-Saharan African average is 136 hours, according to the 2018 Doing Business report by the World Bank in 2018. Twelve types of documents are required to import into Ethiopia, while border compliance costs were USD738, higher than the sub Saharan average of USD688.8. 

Adugna believes that the exaggerated number of laws, regulations and licenses requirements are pushing businesses to engage in illegal trading. “Many prefer to export illegally because of the burdensome requirements. For instance, I have an export permit but I just keep it to fulfil the formality, in case something happens,” he explains.

The high tax rates and custom duties also discourage importers from using legal channels. Belayneh Bogale, lecturer in Development Management at Dilla University, in a study conducted with colleagues entitled ‘Cross-Border Contraband Trade across the Main Route from Moyale to Hawassa,’ indicates that in Ethiopia, a 35Pct import duty, 30-100Pct excise tax, 15Pct VAT, 10Pct sur tax and three percent withholding tax is levied on imported vehicles with spark-ignition engines. In Kenya however, 25Pct import duty, 20Pct excise tax and 16Pct VAT is required for the same vehicle. 

Such significant excise, customs and other tax differences between the two countries, according to Belayneh, makes the legal import of items to Ethiopia relatively expensive, leading individuals and businesses to engage in contraband trade in order to make easy money.

The lack of capacity and inefficient controlling mechanisms are among the major factors responsible for the spreading of contraband trade. Although the fight against contraband is a recurrent theme in Ethiopia, more regular and intensive controls as well as imposing higher fines and appropriate prison sentences, which are globally dominant methods, 

According to the customs proclamation approved by Parliament in 2014, any person who transports, stores, possesses, offers for sale or buys contraband items  knowingly will be punished with a prison term of between three and five years and fine not less than ETB50,000 and not exceeding one million birr.

The government has been trying to follow up on the contraband trade through several different agencies.  “ERCA’s mandate is limited to informing the federal police when we suspect containers, shipment or product , including cash, enter or leave illegally,” explains Sisay Bahiru, Intelligence director at ERCA.  

ERCA has six import/export customs branches at Galafi, Mile, Jigjia, Moyale, Hawassa, and Yabelo, along the borders with Djibouti, Somalia and Kenya. There are 15 customs stations on the border with Somalia alone, while there are branches at Metema, Humera, Gambela and Asosa, with stations under them.  “It is difficult to address, once the product enter border and passed customs stations,” argues Tesfaye about contraband enforcement. 

The spiralling foreign currency shortage  in Ethiopia has also had a tremendous impact on the degree and severity of contraband trade. One notorious contraband centre is Togo Chale, a small town on the border with Somalia. Even though there are no significant legal transactions, many commercial banks surprisingly have branches there. 

The branches serve two purposes. “Hard currency is bought from the parallel market in Addis Ababa, smuggled out through the border and re-enters Ethiopia via the branches to legalize it. It is earned by exporting, for instance, live animals,” explains one bank manager. “The hard currency in the black market is pooled from multiple shadow sources”

Insiders also indicate that some individuals who work at commercial banks also buy hard currency from live animal smugglers, and transport it to Addis Ababa using the bank’s transport facilities, without following the proper accounting and recording procedures. Then they sell it to importers engaged in contraband trade at a higher price.

Experts underline that such practices are not only undertaken by opportunistic individuals. “Nobody can take such big risks without the involvement of higher government officials in the federal and regional structures,” says Amin.  

Officials, however, stress that the practice is not out of the government’s sight. “We know why banks open branches in Togo Chale, a tiny border town with no unique economic significance. It is a strategic location for the contraband trade,” Yinager Dessie, governor of the National Bank of Ethiopia (NBE) said during a recent meeting held with private sector representatives. “NBE will establish a financial intelligence unit to tackle the problem”. 

Experts differ on the impact of contraband trade. Some argue that illegal cross border trade can support the formal economy, and contribute to employment, as players in the shadow economy later invest the money they make into the formal economy. 

However, Amin argues this is not the case in Ethiopia. “Most of the contrabandists and illegal importers in Ethiopia are not poor or unemployed. Either they refuse to work for small salaries in government office or they are millionaires who do not want to pay tax,” he says.

Of course, contraband is politicized in Ethiopia, causing instability and conflicts, in addition to its impact on formal businesses and domestic industries, like the recent political conflict in Somali region. Several people died, properties were looted and churches were burned in a clash between military forces loyal to the regional government and those supporting the Prime Minister’s reforms. 

Amin says the worst is still to come in the contraband network in the region, explaining, “We still do not know how many armaments they smuggled into the country, whether they are involved in human trafficking or whether they are financing terrorist in the horn of Africa.” Terrorist groups like Al-Shabab usually survive on smuggling valuable natural resources out of Africa, and smuggling in industrial goods, in addition to piracy. 

The politicization of contraband in Ethiopia is not limited to Somali region. Just a month ago, ethnic political conflicts were orchestrated by contrabandists in Assosa, the capital of the state of Benishangul Gumuz, a potential gold mining region. A network of business people smuggled gold directly from mining zones to Dubai, via Sudan, according to officials. “They incited the conflict because they were worried about losing the network if the Prime Minister’s changes went through,” officials of the region announced.

Tilaye Gete (PhD), a human resources consultant, says the developmental state mentality, inefficient service delivery, corruption and the government’s grip on the economy not only pushed the private sector to the edge, but also resulted in the failure to achieve major economic targets. 

Policy and institutional reforms for efficient government service provision for the private sector, reducing the government’s hold on the economy and more ample room for the private sector were the final recommendation forwarded during a meeting organised by the Addis Ababa Chamber of Commerce. ”People need to make a living, send their children to school and so on. The government cannot create jobs for everyone, but the private sector can help to bridge the gap,” said Tilaye.

Amin recommends the implementation of three layers of control mechanisms to minimize contraband: efficient and separate control at customs as well as health and standard control. “If illegally traded items pass customs, they can be caught by health and standard officers.”

“If you control more, you give more power to the shadow economy,” argues Alemayehu. “Provided that the demand for underground goods and services remains intact, the profit opportunities in the underground economy become so large that contraband trade business recuperates.”


6th Year . Sep 16  - Oct 15 2018 . No.66


 

 

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