August 15, 2024 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. 4. Removal of rules governing banks' allocation of foreign exchange The NBE has repealed its previous directives that allowed imports based on a waiting-list system for different categories based on priority. 5. 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. 6. 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. 7. 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.
8. 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. 9. 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. 10. Industry parks and Special Economic Zones (SEZs) Industry parks not designated as SEZs may:
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. 11. 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:
For business travel allowance:
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.
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