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The Horn of Africa States Local Currencies Usage in Regional Trade

April 1, 2023

By Dr. Suleiman Walhad
April 2nd, 2023

The transit business of Djibouti is a good candidate for usage of local currencies to assist in the smooth development and growth of trade and investments between Ethiopia and Djibouti. The reason we take this as an opener of this important and significant subject matter of usage of local currencies is that there is a significant transit business in Djibouti. Indeed, it is one of the main pillars of Djibouti’s economy, and the reason is that despite the size of Djibouti as a tiny country, it does, indeed, enjoy an important geostrategic location between the Indian Ocean and the Red Sea, with a coast of some 340 km and a population of some one million people, most of who work for the government and/or in the transit business.

Its importance draws from the fact that it overlooks the Bab El Mandab strait, a 28 km stretch of water separating Africa from West Asia, which connects the Red Sea and the Gulf of Aden, where some 15 to 20 percent of the commercial ships of the world transit through from Europe to Asia and vice versa and where about 10 to 11 percent of oil and gas from the GCC countries to Europe and the northern countries also transit through. Djibouti also at present handles over 90 percent of Ethiopia’s foreign trade and here is where most of the transit business of Djibouti is rooted. This makes Djibouti port the most important trade port in the Horn of Africa States region.

Djibouti is often called the port of Ethiopia, the most populous country of the region and the second in the continent of Africa with some 120 million people. Djibouti also enjoys other advantages such as a stable currency and a stable political environment. It hosts a number of foreign military bases, who compete with each other in trade and other matters across the globe, including those of the United States of America and the people’s Republic of China and, of course, the French, the old colonial power in the country. These bases bring in incomes for the country and perhaps provide a semblance of a security cover in a region messed up politically for a number of decades which, therefore, allowed terrorism in its various colors and shades to thrive.

The transit business of Djibouti clears the imports and exports of Ethiopia and accordingly generates incomes for Djibouti, which the Ethiopia importers and exports need to pay to Djibouti. However, because of the shortage of hard currencies in Ethiopia and exchange controls, therefore, many of the transit businesses of Djibouti always face delays in payments for their services from their Ethiopian clients and hence find themselves entrapped because of shortage of liquidity. They have more receivables and immediate liquidity needs to cover the port and other charges to clear the goods entrusted to them by their Ethiopian clients. One finds, therefore, many transit companies in Djibouti entrapped and financially strained or going bankrupt. They rely heavily on costly working capital borrowings from the local banking and other financial institutions.

It is where usage of local currencies such as the Birr of Ethiopia and the Djibouti Franc can be used to make payments and hence smooth trade and business between the two countries. Note Djibouti imports most of its foods and especially grains, vegetables and livestock from Ethiopia and the Birr collected by the transit businesses as payment for their services can be used to pay for the imports through mechanisms worked out together by the central banks of the two countries. The transit business of Djibouti currently entrapped and strained by lack of and/or shortage of hard currencies in Ethiopia, can be eased accordingly through usage of the local currencies.

Mechanisms developed between Ethiopia and Djibouti can be duplicated to handle businesses between Somalia and Ethiopia and between Ethiopia and Eritrea and likewise between Somalia and Djibouti and Somalia and Eritrea (at present, perhaps, insignificant) and between Eritrea and Djibouti (also at present, perhaps, on hold). This would assist the region from the spillover of global crisis.

The central banks of the Horn of Africa States (HAS) can develop a currencies settlement framework for the region, thus easing trade and payments within the region, instead of being trapped by lack of foreign currencies. This would contribute to the growth of cross border trade and investments within the region, which is currently hampered by the reliance on hard currencies. This would enable conduct of business within the region much faster, more efficiently and , of course, this would strengthen the value of the local currencies, unless the region, comes round to setting up a monetary union, with one currency.





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