Burundi Central Bank: Revocation of all Forex Bureau's Authorization , how did we end up here?
Dear Readers,
This Friday, the Burundi Central Bank announced that it withdraws authorization from all Forex Bureaus
“Following the general non-compliance with the content of our Circular No. 1 / RC / 19 relating to the margin to be applied by exchange bureaus in their operations and to the protection of the exchange profession, and to the harmful consequences that this lack of respect of the regulations is causing to the national economy, the authorization which had been given to the exchange bureaus is withdrawn ” reads the Central Bank ‘s correspondence.
The Forex Bureaus owners are requested to immediately remove the signs showing their address. Only exchange bureaus opened by banks are authorized to ensure the manual exchange of foreign currencies against the national currency.
On December 27, 2019, in a public conference broadcasted live on the media, President Pierre Nkurunziza had warned the forex bureaus that they might be closed if they don’t comply with the Central Bank regulations.
The current situation
Burundi’s central bank sets the official rate for the US dollar at 1,876 Burundian francs but black market traders and forex bureaux can get roughly 2,900 on the streets of Bujumbura. Black market prices make it difficult for businesses to buy dollars at the official rate, further increasing their deficit on imported goods.
In response to the foreign currency crisis, the government has stepped up efforts to target black market traders.
(1)In 2019, the Bank of the Republic of Burundi (BRB) announced a revision of the exchange regulations that were operational since June 2010. Regarding forex bureaus, the bank’s governor, Jean Ciza said that the operators have to be known by the central bank.
The new regulations also require private forex bureaus to increase their minimum capital to Bif 100 million ($54,054) from Bif 50 million ($81,081) and they are expected to provide receipts for all exchange transactions.
BRB asked all forex bureau operators to purchase software valued at two million Burundian Franc ($1,081), a tool to help the central bank to follow closely the bureau’s activities in efforts to comply with the central bank’s exchange rate.
The Burundi central bank clampdown on forex bureaus was meant to clear up illegal dealings in currency exchange as well as stop the sale of dollars at twice the official rate.
Frozen external aid
Following the 2015 political crisis, the exchange rate almost doubled with the dollar exchanging at Bif 3,050 ($1.65) against an official rate of between Bif 1,700 ($0.92) and Bif 1,800 ($0.97).
According to a source from the Central Bank quoted by Alleastafrica Media, the lack of foreign currency is the result of the suspension of bilateral cooperation between the European Union and Burundi.
In March 2016, the EU announced its suspension of financial direct aid to the Government of Burundi. The EU, which was Burundi’s largest donor, used to contribute to more than half of the country’s budget.
Source: aercafrica.org
But the Burundi Foreign currency shortage situation is more complex than it appears
One of the factors that can be taken into consideration to understand the foreign currencies crisis between the Central Bank and the parallel market (Black market), might be the “ The Black Market Foreign exchange supply system ”
As Janvier D. Nkurunziza an Expert in Economics from the University of Oxford explains, foreign exchange supply to the parallel market in Burundi comes from a number of sources.
1.Exporters
First, as exporters are required to surrender their export earnings to government at a low official rate, optimization attitudes induce them to under-invoice their exports; obviously, this is done with the complicity of government officials involved in the process. From the total amount of their earnings, they surrender part of the income and keep the difference in foreign accounts for future use or channel the funds into parallel markets that offer higher exchange rates.
2.Importers
Second, importers who have access to foreign currency at the low official rate have an incentive to over-invoice their imports so that the difference between the amounts they actually secure from the central bank and what they pay for their imports can be put into foreign accounts or channeled into parallel markets. In the context of low tax evasion, import over-invoicing is profitable only when import taxes are low, so that the gains made on the foreign exchange sold in the parallel market compensate for the extra taxes paid on non-imported merchandise. If there are corruption and high tax evasion, export over-invoicing is more profitable.
3. Visitors and Residents
The third source of supply is from Burundi residents and visitors coming from abroad who channel their foreign currency into the parallel market, given that it offers better exchange rates.
Janvier concludes that the parallel market for foreign currency in Burundi has arisen in response to government distortions in the allocation of foreign exchange to economic agents.
“ The allocation has been made on the basis of import licenses, which in turn are accorded to a handful of importers handpicked not always on the basis of their economic merit, leading to inefficiencies, rent-seeking, and smuggling.” He adds.
The solutions
Based on the findings of his research titled “Exchange rate policy and the parallel market for foreign currency in Burundi” Janvier suggests that successful unification of the parallel and the official markets would require long-term measures, strong and sustainable enough to “destabilize” the parallel market.
Noting that beyond auctions organized by the Central Bank, the government should foster a more competitive banking sector in order to increase efficiency in the use of the country’s limited financial resources, including foreign currency.
Meanwhile, in the news, commentators think that the withdrawal of authorization from the forex bureaus will not solve the problem of the scarcity of foreign currencies in Burundi. They emphasize the need for adequate financial, economic and political solutions.
What do you think about the Foreign Currencies Shortage in Burundi?
I’d love your comments. And feel free to forward this to a friend.
Have a nice weekend!
Fabrice Iranzi
Founding Editor, RegionWeek.com
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