Introduction
On July 29, 2024, the National Bank of Ethiopia ("NBE") enacted the Foreign Exchange Directive No. FXD/01/2024 (the "Directive"), marking a historic shift in Ethiopia’s foreign exchange regime. This Directive introduces a range of significant changes, including a move to a market-based exchange regime, removal of import restrictions, and revised retention rules for exporters. While this reform is unprecedented in Ethiopia, it has sparked debate about whether it will meet the government's intended objectives and anticipated outcomes.
1. Policy Objectives of the Directive: The preamble of the Directive clearly articulates that its ultimate purposes and objectives of reforming Ethiopia’s foreign exchange policy are:
· To Promote Trade, Financial Stability, and Economic Growth: The Directive aims to enhance trade activities, ensure financial stability, and support economic growth through the establishment of a structured and transparent market.
· To Attract Foreign Exchange Inflows: By creating a more open and competitive market environment, the Directive seeks to attract substantial foreign exchange inflows.
· To Ensure Efficient Resource Allocation: The Directive is designed to foster competition and transparency in foreign exchange transactions, thereby improving the efficiency of resource allocation.
· To Consolidate and Revise Existing Directives: The Directive aims to update and unify various existing regulations related to the foreign exchange market, creating a cohesive and streamlined regulatory framework.
2. Major Policy Changes
2.1. Market-Based Exchange Regime
The foreign exchange reform announced by NBE as of today involves significant new policy transformations including a shift to a market-based exchange regime, whereby banks are henceforth allowed to buy and sell foreign currencies from their clients or to their clients and among themselves at freely negotiated rates, and with the NBE making only limited interventions to support the market.
2.2. End of Surrender Requirements
The Directive eliminates the previous surrender requirements, allowing exporters and commercial banks to retain foreign exchange. This change is expected to significantly increase the availability of foreign exchange for the private sector, enhancing liquidity and potentially boosting economic activity.
2.3. Removal of Import Restrictions
The Directive removes the previous prohibitions on 38 product categories, thereby significantly broadening the scope of import liberalization. According to the Directive, this development facilitates greater access to foreign exchange for a wider range of imported goods and services, promoting a more open and competitive market. While these changes ease import restrictions, capital account outflows will continue to be subject to existing restrictions, maintaining controls over international financial movements and investments.
2.4. Improved Retention Rules
Under the Directive, exporters are now permitted to retain 50% of their foreign exchange proceeds, an increase from the previous 40%. This enhancement in retention rules allows exporters to keep a larger share of their foreign currency earnings, providing them with greater financial flexibility. The improved retention rate aims to support exporters by increasing their liquidity and enhancing their capacity to reinvest in their operations or manage their foreign exchange needs more effectively.
2.5. Abolishment of Allocation Rules
The Directive eliminates the waiting list system previously used by banks for allocating foreign exchange for imports. This change removes the need for importers to wait for their turn in a queue, thereby streamlining the process and allowing for more immediate access to foreign currency. By abolishing this system, the Directive aims to enhance the efficiency and transparency of foreign exchange allocation, enabling businesses to acquire the necessary foreign currency for imports more swiftly and with greater ease.
2.6. Non-Bank FX Bureaus
The Directive permits the establishment of non-bank foreign exchange bureaus, which are now authorized to buy and sell foreign currency cash notes at market rates. This move introduces additional channels for foreign currency transactions, increasing competition and accessibility in the foreign exchange market. By allowing these bureaus to operate, the Directive aims to enhance market liquidity, provide more options for currency exchange, and contribute to a more dynamic and responsive foreign exchange environment.
2.7. Franco Valuta Imports
The Directive announces that restrictions on franco valuta imports will be lifted through forthcoming regulations. This change will allow for more flexibility in the importation of foreign currency cash notes, facilitating smoother and more efficient transactions involving franco valuta. By removing these restrictions, the Directive aims to streamline the import process, enhance foreign currency flow, and support a more open and accessible foreign exchange market.
2.8. Simplified Foreign Currency Account Rules
The Directive introduces simplified regulations for foreign currency accounts held by foreign institutions, foreign direct investment (FDI) companies, and members of the Diaspora. These new rules are designed to streamline the management and operation of such accounts, reducing regulatory complexities and enhancing ease of use. The simplification aims to facilitate smoother transactions and interactions for these account holders, thereby promoting greater investment and engagement with Ethiopia's foreign exchange market.
2.9. Resident FX Accounts
The Directive allows residents to open foreign currency accounts based on various sources, including remittances, transfers from abroad, foreign exchange-based salaries, or rental income. These accounts can be used for making payments for foreign services, providing residents with increased flexibility in managing their foreign currency transactions. This change aims to facilitate easier access to foreign currency for residents and support their international financial activities.
2.10. Other Changes in Forex Policy: Other major changes in the new reform to foreign exchange policy also includes:
· Interest Rate Ceilings: The directive removes previous ceilings on interest rates for private sector borrowing from abroad, allowing for more flexible financing conditions.
· Securities Market Access: Ethiopia’s securities market will be opened to foreign investors, with specific terms to be defined in the near future.
· Special Economic Zones (SEZs): Companies within SEZs are granted the ability to retain 100% of their foreign exchange earnings, enhancing their financial autonomy.
· Traveler Currency Rules: Restrictions on the amount of foreign currency cash notes travelers can carry into or out of Ethiopia are relaxed, simplifying cross-border transactions.
By way of concluding, the Directive represents a historic shift in Ethiopia’s foreign exchange policy, introducing major reforms such as a market-based exchange regime, removal of import restrictions, and changes to retention rules. While these reforms aim to enhance market efficiency and economic growth, their long-term impact remains uncertain. The effectiveness of these changes in achieving their goals or potentially complicating Ethiopia’s economic challenges will become clear over time.
Disclaimer: This summary is for informational purposes only and does not constitute legal advice. Million Alemu Legal Services assumes no responsibility for any actions or inactions taken based on this legal update. For reliable and timely legal guidance on foreign exchange issues in Ethiopia, our legal team is ready to assist you. Feel free to contact us anytime. Feel free to reach out to us at Cette adresse e-mail est protégée contre les robots spammeurs. Vous devez activer le JavaScript pour la visualiser.. Compiled by Yideg Sale_Legal Associate at Million Legal Services
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| File | Description | File size |
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 ETH-NBE- Foreign Exchange Directive.pdf | 721 kB |