(This part was written prior to the Eritrean invasion of May 12; Part II (new) will discuss the Eritrean Current Account Deficit (22% of GDP in 1996) and explain why Eritrea badly miscalculated when they changed their currency in November 1997 - they expected Ethiopia to accept their currency in Ethiopia, and in essence finance their massive current account deficit - one of the worst in the entire world. By contrast, Ethiopia's current account deficit has never exceeded 4% of GDP)
Dear Netters:
After recently reading an interview article (nov. 1997) by Tekie Beyene head of the Eritrean central bank, I was left shaking my head in wonder at the audacity of the EPLF government in its dealings with Ethiopia. Take a look at the following discussion.
The subject at hand in Tekie beyene's Interview was the new Eritrean currency, and Eritrea's demand to have their stock of old Birr converted to dollars. This is one of the most arrogant behaviors yet exhibited by the EPLF government. Allowing Eritrea to use the Birr was a courtesy that they should have been grateful for. Now they want to present Ethiopia a bill for it?
At independence, all Birr should have been withdrawn from Eritrea, and they should have issued their own currency. Instead, the money supply in Eritrea was increased by cooperation with Ethiopia's central bank. They were advanced loans whenever they needed capital. Their goods were allowed to enter Ethiopia duty-free and compete with Ethiopian products using the same currency.
Now that the common currency arrangement is over, whatever capital accumulation that resulted in Eritrea as a consequence of these activities has been transferred into Nakfa currency --- the old Birr is valueless. The same situation occurs in Ethiopia. The capital which previously existed has been transferred into new Birr. The old notes are valueless.
Instead of being thankful for the services provided by Ethiopia, the EPLF wants to present Ethiopia with a bill of 200 Million US dollars or more!!!!! Tekie Beyene said that the EPRDF has accepted this demand in principle!!!!!!!!!.
That is absolutely ridiculous. Even if they manage to extort the money from Ethiopia now (extremely doubtful), they should be aware that future Ethiopian governments will take all necessary recourse to recover these funds.
Thanks to the dishonest behavior of the EPLF government, future relations between Eritrea and Ethiopia may be headed to an India-Pakistan type situation which would be terrible for both countries. One hopes that Anadarko will find sufficient oil in the Red Sea to get the Eritrean burden off Ethiopia's back.
The consistent message from Eritrea is that they intend to be a financial service center for the REGION. What REGION? Could they possibly be thinking that Ethiopia's finance center is going to be located in Eritrea? Or are they referring to Djibouti?
There are two types of services they could provide:
Eritrea lacks the resources, and the EPLF are too much of "control freaks" to provide the Type 1 services listed above. They are refusing to allow internet, the phone network desperately needs new investors after the problems encountered by Daewoo, their currency is new and extremely risky, there is a huge shortage of capital for the tiny market of Eritrea itself let alone to service other countries, no banks are interested in establishing branches in Eritrea... etc etc...
Furthermore, none of the countries in the region have any potential need for such services from Eritrea Sudan, Djibouti and Somalia are tied into the Arab financial centers. Ethiopia is setting up its own finance industry. It has a stable currency, a large market, private banks, and better infrastructure. Foreign banks will eventually be permitted to operate in Ethiopia - Credit Lyonnais (France) was reportedly already interested. It is bizarre behaviour to think that banks are going to set up operations in Eritrea to service Ethiopia.
This brings us to the Type 2 services. These are the only "services" Eritrea will be able to "provide". But providing tax shelters and promoting devious business practices is considered bad behaviour. Germany is very upset with Luxembourg as it is currently losing billions of dollars in potential tax revenue. On the other hand, the Colombian drug smugglers are very happy with Panama as they can easily launder their drug money there.
Conclusion
The Ethiopian government should begin now to warn
the EPLF that it will not tolerate such activities. In fact it is probably
best to end all the special economic arrangements with Eritrea until a new,
honest, and truly self-reliant government is established in Eritrea.
The EPLF needs to focus on developing a manufacturing, export based industry. Forget about trying to get a free ride from Ethiopia.
- Dagmawi