REMITTANCES AND HARD CURRENCY: ERITREA'S LIFELINE

S E C R E T ASMARA 000158 SIPDIS NOFORN SIPDIS LONDON FOR AFRICA WATCHERS, PARIS FOR AFRICA WATCHERS E.O. 12958: DECL: 02/16/2017 TAGS: PGOV PINR ECON EFIN ER SUBJECT: REMITTANCES AND HARD CURRENCY: ERITREA'S LIFELINE Classified By: AMB. Scott H. DeLisi for reasons 1.4 (b) and (d). ¶1. (S/NF) SUMMARY: As the Government of Eritrea (GSE) and its sole political party, the PFDJ, continue to hold the Eritrean economy in a strangle-hold, the economy continues to circle the drain, making hard currency and remittances the critical factors for Eritrea's on-going economic survival. The IMF estimates Eritrea receives over USD 450 million each year in remittances, representing over 50% of Eritrea's GDP. Eritreans in the diaspora are required to pay 2% of their annual income in taxes to the (GSE) at Eritrean Embassies and Consulates overseas in order to receive any services. Many complement this 2% by sending money, through legal and illegal means, to their family members in Eritrea. In addition, the Eritreans' desperation for hard currency has led to severe restrictions on foreign exchange within Eritrea. Meanwhile, the lack of transparency in banking and finances in Eritrea raises questions and concerns about how the GSE organizes the movement of funds throughout the world. End Summary. THE INFAMOUS 2% AND OFFICIAL GOVERNMENT INCOME -------------- - ¶2. (S/NF) In order to receive any services from the GSE - including birth certificates, marriage certificates, and exit visas when you come for a visit ) all Eritrean citizens living abroad must pay a tax of 2% of their annual income earned overseas. The income tax must be paid in hard currency, such as dollars, euros, Saudi riyals, or UAE dirhams, to the closest Eritrean Embassy/Consulate or in certain circumstances can be paid while visiting Eritrea. The GSE does make exceptions for students, youth, elderly and others with no income, however, they still must present themselves at least once per year to the Eritrean Embassy/Consulate to certify their circumstances. Acquiring citizenship in their country of residence does not result in the GSE relinquishing its claim on their income. ¶3. (S/NF) In the past many Eritreans in the U.S. claimed they earned minimum wage and paid their 2% based on a 40 hour minimum wage work week. Recently, the GSE has eliminated this loophole. Now Eritreans in the U.S. must present their IRS W2 form as proof of income. For Eritreans in the Middle East or Europe, the Embassies prefer dollars or euros, however, Post has received reports that in Jeddah, the Embassy will accept Saudi riyals, and dirhams are accepted in Dubai. ¶4. (S/NF) The GSE takes this 2% seriously and appears to have a well coordinated system of tracking payments. A recent U.S. immigrant visa (IV) recipient encountered this when he applied for his exit visa to depart Eritrea. Upon appearing at the government office to apply, the government official insisted on knowing the name of his sponsor in the U.S. The official then took the name and asked the IV recipient to return at a later date. At the second meeting, the official informed the IV recipient that until his sponsor paid his 2%, the IV recipient would not be able to obtain his exit visa. In the end, the sponsor paid the 2% and the IV recipient was issued an exit visa. ¶5. (S/NF) Recently, Poloff spoke with an Eritrean business person about the taxes paid by Eritreans. The Eritrean, who frequently travels outside of Eritrea, explained that for items being imported from Saudi Arabia, the importers are being permitted to pay the customs fees and other taxes in Saudi Arabia in Saudi riyals at the Eritrean Embassy/Consulate in Jeddah. Once the customs is paid in Saudi Arabia, upon arrival in Eritrea the importer does not pay customs again. Thus, the GSE is taking the tax in an exchangeable currency, the riyal, and creating a work around so the GSE can avoid receiving its own currency. GETTING THE MONEY INTO THE GSE'S OR PFDJ'S COFFERS -------------- -------------- ¶6. (S/NF) With the GSE collecting all the money overseas, the questions remain: where does it go and how does it get back to Eritrea? In the past, Post received reports that the Eritrean Embassies and Consulates took a percentage of the money paid in order to cover operating expenses. They could also use official banking mechanisms to transfer the money back. However it appears as though the GSE uses more unorthodox methods as well to move its cash. ¶7. (S/NF) In a recent meeting with a well-traveled Eritrean, the Eritrean confessed to the Poloff that the GSE had previously asked him to hand carry a briefcase of cash to Eritrea. He further asserted that the GSE sends money back to Eritrea in the diplomatic pouch, and that the Eritrean diplomat,s primary function is to serve as couriers for the cash collected. He went on to state that Eritrean officials such as Hagos Ghebrehiwot, the former Eritrean Ambassador to the U.S.; Yemane Ghebreab and other Eritrean officials frequently hand-carry cash between Europe, the Middle East and Eritrea. (NOTE: For travel within the Middle East and Northern Africa, they often travel on chartered plans and are most likely exempted from traditional customs and immigration requirements by their regional neighbors. End note.) ¶8. (S/NF) The Eritrean, sharing an experience he had when working with an international company, also told us that when the GSE submitted to the company the information on the transfer of funds to Eritrea, the account provided to the company was not a GSE account but rather an account held in the name of a prominent GSE official. (Note: The Eritrean implied the account was in the name of the President, however, when pressed, he declined to provide the name. End note.) He also pointed Poloff to a January 4, 2000 article in the Financial Times that noted that Eritrea was in the top 10 for countries with the largest percentage growth in anonymous deposits in Swiss banks. Included in this list were Vietnam, Albania, Sierra Leone, Zambia and Benin. LEGAL TRANSFERS TO ERITREA: HIMBOL AND THE TWO BANKS -------------- -------------- ¶9. (S/NF) Money can be transferred legally into Eritrea through two mechanisms: Himbol Financial Exchange ) Eritrea's Western Union - and between banks. Owned by the PFDJ, individuals and businesses overseas may wire money back to Eritrea through Himbol. The individual pays in dollars or another foreign currency at Western Union, any money exchange or any bank overseas, and the recipient is paid in Eritrea by Himbol in nakfa. The transfer is exchanged at the GSE official rate of 15 nakfa to 1 USD. For these types of transfers, there is no prohibition against sending foreign currency to Eritrea as long as it is paid out in nakfa. Himbol charges a 10% service fee that is charged to the foreign currency. For example, if an individual sends USD 100, the recipient receives USD 90 the equivalent in nakfa (1350). ¶10. (S/NF) In addition to Himbol money can be transferred from Western Union (or its equivalent) or a bank directly to an Eritrean Bank. There are two banking institutions in Eritrea, the Eritrean Commercial Bank owned by the GSE and the Housing and Commerce Bank owned by the PFDJ. Money can be wired directly to these banks. Unless the recipient has a foreign currency account in the bank, the money is paid out in nakfa. For transfers to an Eritrean bank where the recipient does not maintain an account (either in nakfa or dollars) the fee varies from 10-20% depending on the amount of money transferred, the smaller the amount transferred the higher the service charge. For bank to bank transfers (a USD account in a U.S. bank to a nakfa account in an Eritrean bank) the service charge varies from 5-10% and again the smaller the amount the higher the fee. ¶11. (S/NF) In order to conduct the transfers, Himbol and the two Eritrean banks use a correspondence/routing bank. The head of the Eritrean Housing and Commerce Bank told Poloff there are five correspondence banks used by the two Eritrean banks. Three of them are Chase Manhattan, Citibank and Deutche Bank. MY GRANDMA NEEDS SOME CASH(SENDING MONEY TO MY FAMILY -------------- -------------- ¶12. (S/NF) Many family members use Himbol, the PFDJ owned "Western Union" of Eritera, and the banks, however, many use other informal systems to send money to family members in Eritera. In interviews with immigrant visa applicants, many concede that their family members in the U.S. send them U.S. dollars via the U.S./Eritrean postal services while others ask people to hand-carry the money for them from the U.S. or Europe to Eritrea. When individuals bring in the money with them, the person carrying the cash must make the choice to either legally declare it at the airport or to try to sneak it in without declaring it. U.S. Embassy foreign nationals are often asked by Eritreans in the U.S. to serve as a money courier when they go for training. If the money is declared at the airport upon arrival, only Himbol or one of the two banks may officially (and happily) exchange dollars for nakfa. Upon exchanging the currency, the individual receives a receipt as proof of what happened to the U.S. dollars and must present that receipt when asked. THE HAWALA WAY OF 17TH & U -------------- ¶13. (S/NF) Even with money being sent through the mail and hand-carried to Eritrea, the most popular informal way of sending money to Eritrea, is through "hawala." In the informal system, the broker in the U.S. (or overseas) collects dollars from someone wishing to send money to Eritrea. The broker then calls someone, usually a business partner or relative, who distributes the money in nakfa to the identified recipient in Eritrea. A popular system, this process pays a higher rate, generally between 19 ) 22 nakfa per U.S. dollar. ¶14. (S/NF) In late October and early November of 2006, the GSE cracked down on the hawala system and the illegal money changers. There were reports that over 30 Eritreans were arrested in Asmara alone, including several well-known businessmen. The GSE announced the crackdown in the state owned media and noted "a pertinent body has starting taking the necessary legal measures on people inside the country and abroad who are engaged in illegal currency exchange and transfer" and the "pertinent body" cautioned individuals to use the legal means of money transfer. They reiterated the local law, citing proclamation 101/2005 that has restrictions on foreign currency exchange. Due to these arrests and the increased scrutiny on hawala and the illegal money changers, the black market exchange rate has dropped to 18.5 nakfa to one USD. (Note & Comment: Simultaneously the GSE reportedly arrested some businessmen with large foreign currency accounts. Post believes the GSE intends to come up with some charge that they were engaged in illegal activities in order to seize the funds. End Note & Comment.) GETTING MONEY OUT OF ERITREA -------------- ¶15. (S/NF) Transferring hard currency out of Eritrea is extremely difficult. The only way to get USD, or other hard currencies such as the Euro or yen, out of Eritrea legally is through a USD account at one of the two banks. Foreigners who have USD accounts have nearly unfettered access to their money and to sending it out of the country but may still be subject to limitations. Eritreans face long and complicated rules. Individuals traveling outside of Eritrea are allowed to take up to 150 USD out for each day they will be out of the country. Businessmen who wish to use the money for their enterprises must be able to show both the source of the USD initially and the licenses indicating they have permission to import what ever item they are trying to purchase outside of Eritrea or permission to conduct the business - such as paying for services. The law follows on the January 2005 proclamation 191/2005 removing the parallel currencies and limiting import/export. Poloff has heard reports that the two banks, owned by the GSE and PFDJ can and do refuse depositors access to USD and other foreign currencies. Just as the GSE uses the correspondence banks to transfer money in, they also use them to transfer the money out. COMMENT -------------- ¶16. (S/NF) With nearly no exports, an inability to produce enough domestically to meet the basic needs of the population, and its continued large-scale procurement of military supplies and equipment, the GSE will continue to be dependent on hard currency to survive. Disrupting the hard currency supply chain would significantly and detrimentally impact the operations of the GSE and its sole political party, the PFDJ. End Comment. DELISI