Ethiopia makes major changes to foreign exchange regime

Executive summary

The National Bank of Ethiopia (NBE) on 29 July 2024 announced (in Directive No. FXD/01/2024) (the Directive)a reform of the foreign exchange regime with immediate effect. The reform introduces a competitive, market-based determination of the exchange rate and addresses a long-standing distortion within the Ethiopian economy.

The Directive involves significant policy changes in the areas listed in this Alert.

Policy changes

1. Shift to a market-based exchange regime

Banks will be allowed to buy and sell foreign currencies from/to their clients and among themselves at freely negotiated rates. The NBE will make only limited interventions to support the market in the regime's early days and if justified by disorderly market conditions.

2. End of surrender requirements to the NBE and improvement of retention rules

Exporters and commercial banks are allowed to retain foreign exchange (i.e., foreign currency). Exporters of goods and services shall immediately convert into Ethiopian Birr (ETB), at a freely negotiated rate, 50% of their export proceeds to the Bank used in processing their foreign exchange transaction, while keeping the remaining 50% in their Foreign Exchange Retention Account. However, the conversion requirement is not applicable to foreign exchange inflows related to foreign direct investment (FDI), foreign grants, all foreign currency (FCY) accounts, external loans, and portfolio inflows.

3. Removal of import restrictions

Authorized banks are mandated to allow import of goods for any value, against submission (including via electronic methods) of required documents by the importer.

5. Removal of rules governing banks' allocation of foreign exchange

The NBE has repealed its previous directives that allowed imports based on a waiting-list system for different categories based on priority.

6. Introduction of non-bank foreign exchange bureaus

By the authorization of the NBE, foreign exchange bureaus may operate either as a specialized window of banks or as independent (non-bank) foreign exchange bureaus without any bank affiliation.

Independent foreign exchange bureaus are to engage solely in the business of buying and selling foreign exchange cash notes and are not to engage in any other area of banking activity. These independent foreign exchange bureaus are required to fulfill the capital requirement of ETB15m and should be able to provide an ETB30m security deposit to be placed in a blocked account (which can be interest-earning) at any bank, among other requirements.

7. Removal of restrictions on franco-valuta imports

Any imports of goods that do not utilize foreign exchange resources from the banking system (widely known as "franco-valuta imports" and not requiring the use of Letters of Credit, Cash Against Deposit, advance payment or other payment modalities) shall be permitted to enter the country subject to all the usual customs, tax, health and other pertinent regulatory standards and implementation shall be set by the relevant authorities or regulations.

8. Foreign currency accounts

Eligible individuals and entities may establish FCY accounts upon fulfilling the requirements applicable for specific accounts. The following three categories of FCY accounts are authorized by the NBE, and additional types of accounts may be permitted from time to time.

1. FCY Accounts for Foreign Entities, including FDI companies, international organizations, embassies, and foreign nongovernmental organizations (NGOs)
   
   
2. FCY Accounts for Resident and Nonresident Ethiopians, including for nonresident foreign nationals of Ethiopian origin
   
   
3. Retention Accounts for exporters of goods and services

9. External loans

No person or entity may enter into a foreign loan contract without first consulting with the NBE (in the case of the Government) and obtaining the NBE's approval (in all other cases). If a loan contract is entered into without fulfilling these requirements, foreign exchange for the repayment of the loan may be denied.

Note, however, that the NBE has removed the interest rate ceiling that previously applied to private sector companies and banks when borrowing from abroad.

10. Securities market to foreign investors

An NBE press release dated 29 July 2024 indicated that the securities market is open to foreigners, although the terms and conditions are to be specified further in the near future.

11. Industry parks and Special Economic Zones (SEZs)

Industry parks not designated as SEZs may:

• Buy, in FCY, raw materials or inputs manufactured by another investor within the same industrial park or across another industrial park from its FYC and/or retention account
  
  
• Sell its manufactured product within the industrial park as an input to another investor within same industrial park or across another industrial park in FCY via credits to its retention account
  
  
• Open an FCY account to foreign employee of industrial park
  
  
• Issue export and import permits for trade within and between industrial parks

Consistent with other relevant laws related to Special Economic Zones (including industrial parks designated as SEZs) companies operating in SEZs shall enjoy some special benefits in their foreign exchange dealings.

12. Foreign currency cash notes for travelers

For personal travel outside Ethiopia (such as for holiday, education, medical and other personal reasons), a foreign exchange bureau may sell foreign exchange to an individual Ethiopian national or a foreign resident upon presentation of passport, valid entry visa, if applicable, and air ticket.

For personal travel foreign exchange sales:

• Travelers are entitled to US$5,000 or its equivalent in other convertible currencies, which may be provided as cash notes or via a debit card.
  
  
• FCY account holders are entitled to US$10,000 or its equivalent in other convertible currencies, which may be taken in cash notes or via a debit card. In addition, the account holder can take up to 10% of their outstanding FCY account balance via a debit card.
  
  
• Unless otherwise authorized by the NBE, any Ethiopian resident may not carry cash notes exceeding US$10,000 or equivalent per travel excursion.

For business travel allowance:

• Government travelers may receive total cash notes not exceeding US$10,000 or the equivalent in other convertible currencies, as per the Council of Ministers Directive in relation to Government institutions per diem, accommodation and other related expenses. These funds may be received in cash notes or via a debit card.
  
  
• FCY account holders may receive up to US$10,000 or its equivalent in other convertible currencies in cash notes or via a debit card. In addition, the account holder can take up to 10% of their outstanding FCY account balance via a debit card.
  
  
• Withdrawals of cash notes for the purpose of convening conferences, workshops, meetings and per-diem payments by embassies, international organizations and regional organization can be made based on the request submitted and requirements of the program to be carried out.
  
  
• If a chartered plane trip is arranged, the amount approved shall be based on the related documents presented for the trip and charter arrangement with an airline.
  
  
• Travelers who are going to neighboring countries using their own transport means or surface transport, in lieu of an air ticket, may purchase FCY upon presentation of a car passage certificate or letter from the concerned government organization or company.
  
  
• Unless otherwise authorized by the NBE, no Ethiopian resident may carry cash notes exceeding US$10,000 or equivalent per business trip.

Transitional provisions

All foreign exchange directive and circulars that the NBE has issued to date are hereby repealed and replaced by this Directive, effective as of 29 July 2024.

Next steps

Investors should further evaluate the implications of the new Directive on their business and watch for future regulations, as well as any amendments to the Directive.