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
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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
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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
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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
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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
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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