Introduction

Ethiopia has embarked on a new era of economic policy, marked by currency devaluation and a significant revamp of the foreign currency exchange regime.The National Bank of Ethiopia (NBE) has revised its long-standing practice of fixing and controlling the exchange rate, opting for a market-based exchange regime. It has introduced a new Foreign Exchange Directive (FXD/01/2024) on July 29, 2024, which repealed all the previous sporadic directives governing the foreign exchange regime and consolidated the applicable rules into a single directive. This move is the fourth and by far the most radical currency devaluation measure taken by the government since the fall of the Derg regime in 1991. 

DABLO has examined the content of the new Directive, and here are the key legal changes brought by the Directive.

Market-Based Exchange Regime: The role of the NBE has been reduced to monitoring the overall operation while the foreign exchange regime is to be governed by the market. Banks are allowed to freely set exchange rates and trade currencies with their customers and among themselves.[1] The NBE will compile an Indicative Daily Exchange Rate based on reports of daily exchange rates used by the banks. This rate will serve as a reference to set exchange rates but is by no means binding on the banks, as they are free to negotiate the market rate. Banks are required to report their daily foreign exchange rates to the NBE using a predetermined format.[2]

The directive has introduced a two-tier structure for spot foreign exchange markets. The first tier is the wholesale or inter-bank forex market, where authorized banks engage in foreign currency transactions with one another.[3] The second tier is the retail forex market, where authorized banks or foreign exchange dealers conduct transactions with their customers. In this market, banks are permitted to negotiate buying and selling rates freely with their customers, allowing for greater flexibility in pricing based on market conditions and customer agreements.

Currency Surrender: One of the most notable changes in the Directive is the elimination of the requirement for commercial banks and exporters to surrender their export earnings to the NBE. This change aims to give exporters greater flexibility in managing their finances. Exporters are now permitted to retain 50% of their export earnings in foreign currency, up from the previous 40%.[4] Exporters are permitted to use the foreign currency solely for their own purposes and may retain it in their retention account indefinitely.[5]

Import Restrictions and Currency Allocation: The Directive lifts the previously imposed import restriction on 38 product categories while maintaining the restriction on capital account outflows. It is interesting to note that while the Directive uncategorical lifts the restriction on the 38 product categories, a letter written by the Ministry of Finance on July 30, 2024, maintained the restriction imposed on imports of fully assembled automobiles that run on fuel and three-wheel vehicles. The Directive also removes the rules governing banks’ allocation and distribution of foreign exchange, which was previously managed through a waiting list system for various import categories.

Engagement of Non-Bank Actors: The Directive paves the way for non-bank actors to engage in foreign currency transactions at market rates. These entities must obtain prior authorization or a license from the NBE.[6]  Accordingly, on October 2, 2024 the National Bank has announced that five companies who applied for licenses and fulfilled the minimum requirements set by the Bank have been granted licenses to operate as Independent Foreign Exchange Bureaus.

Franco Valuta Imports: Although the directive initially lifted restrictions on Franco valuta imports[7],  the Ministry of Finance has reinstated the ban on imports that do not utilize foreign exchange from the banking system. In a letter sent to the Customs Commission and the National Bank of Ethiopia on November 8, 2024, the Ministry announced its decision to reimpose the restriction. As a result, the Franco valuta ban has been reinstated just three months after it was lifted by the directive.

Foreign Currency Accounts: The directive significantly relaxes the regulations governing foreign currency accounts for foreign institutions, foreign direct investment (FDI) companies, international organizations, embassies, foreign NGOs,[8] and the Ethiopian diaspora.[9] It permits the opening of three types of foreign currency accounts: Foreign Currency (FCY) Accounts for Foreign Entities, FCY Accounts for Residents and Non-Resident Ethiopians, and Retention Accounts for exporters of goods and services. Foreign entities are now allowed to maintain multiple accounts across different financial institutions, unlike the previous times where they were allowed to maintain a single foreign currency account.[10] Additionally, foreign nationals employed by these entities can fully utilize their accounts without being required to surrender any portion of their foreign currency earnings. For Ethiopians, both resident and non-resident, the directive broadens the scope of foreign currency accounts, enabling them to receive funds from international remittance service providers, salaries, rental income, and other legitimate sources. These accounts can also be used to make payments for foreign services, further enhancing financial flexibility.

Repatriation of Capital: To enhance Ethiopia’s appeal as a destination for foreign direct investment, the directive establishes clear and streamlined procedures for the repatriation of capital and earnings. It explicitly recognizes the rights of foreign investors to transfer funds abroad in convertible currency, ensuring ease of capital movement. Under this directive, foreign investors can repatriate profits and dividends earned from their investments, proceeds from the sale or liquidation of an enterprise, and funds obtained from the transfer of shares or ownership in a business.[11] Additionally, investors who are unable to commence operations are entitled to reclaim their initial investment, while profits from portfolio investments in equity or debt securities can also be repatriated.

Eased Rules for External Loans and Supplier Credit: The directive introduces significant reforms to enhance financial flexibility and investment opportunities. It removes the previous interest rate ceiling on foreign borrowings, allowing banks and companies to negotiate competitive financing terms with external creditors freely. Additionally, it expands the list of eligible entities that can access foreign loan, now construction companies can now access supplier credit to import machinery. However, to maintain regulatory oversight and financial stability, all loan agreements with external creditors must be registered and approved by the National Bank of Ethiopia (NBE). [12]

Foreign Investments in Security Market: The Directive opens the Ethiopian Securities Market to foreign investments, paving the way for international participation and investment. However, its implementation is to be governed by specific regulatory requirements established by the National Bank of Ethiopia and the Ethiopian Capital Market Authority (ECMA).[13]

Special Privileges for Companies in Special Economic Zones: Under the Directive, Companies operating in Special Economic Zones (SEZ) are granted special foreign exchange privileges, including the ability to retain 100% of their foreign exchange earnings. [14]

Limits on Foreign Currency: The rules governing the amount of foreign cash travelers could carry while traveling to and from the country have been relaxed.[15] The Directive also stipulates specific time limits for holding and converting foreign currency for individuals entering the country.

Off-Shore Accounts: The Directive also allows the opening of off-shore accounts for Strategic Foreign Direct Investment projects.[16] Projects with special significance and contribution in terms of size, job creation, import substitute, foreign exchange inflows, technology transfer, or sector-specific impact could be allowed by NBE’s Executive Management to own off-shore accounts.

Sanction: The Directive imposes a sanction of USD 2,500.00 (two thousand five hundred US Dollars) per violation on banks and other licensed entities for any violation of the Directive. In addition, NBE has also been given the discretion to impose further sanctions.

Conclusion

In conclusion, the introduction of the Foreign Exchange Directive (FXD/01/2024) represents a transformative shift in Ethiopia’s economic landscape, signaling a move towards greater market flexibility and financial openness. By removing restrictions on foreign exchange and creating a more liberalized environment for both domestic and foreign investors, the directive aims to foster economic growth, attract foreign direct investment, and improve financial stability. While the transition to a market-based exchange rate system and other key reforms offers significant opportunities, ongoing regulatory adjustments, such as the reimposition of the Franco valuta import ban, highlight the complex balancing act the government faces in managing the country’s economic interests. As Ethiopia continues to adapt to these changes, the ultimate success of these reforms will depend on how effectively they are implemented and their ability to generate sustainable growth in the evolving global economy.


Footnotes

[1] Article 4, The Foreign Exchange Directive No. FXD/01/2024 (herein under FXD 01/2024)

[2] Article 5, Id.

[3] Article 4.3, Id.

[4] Article 6.2, Id.

[5] Previously, the directive permitted exporters to retain 50% of their foreign currency earnings for only one month, after which they were required to sell it to commercial banks at a freely negotiated rate. However, as of November 14, 2024, the National Bank of Ethiopia has revised this policy, allowing exporters to retain the 50% indefinitely, providing greater flexibility in managing their foreign exchange holdings.

[6] Article 4.2, FXD 01/2024.

[7] The importation of goods for which foreign exchange from the domestic banking system is not payable.

[8] Article 13, FXD 01/2024.

[9] Article 14, Id.

[10] Article 13.2.1, Id.

[11] Article 16.2, Id.

[12] Article 17.1, Id.

[13] Article 20, Id.

[14] Article 21.3, Id.

[15] Article 22.7, Id.

[16] Article 19, Id.

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