Background
The National Bank of Ethiopia (NBE) unveiled a groundbreaking Foreign Exchange Directive yesterday, merging previous directives into a unified and comprehensive document known as Foreign Exchange Directive No. FXD 01/2024 ("Foreign Exchange Directive"). Dubbed the 'Green Directive' by the NBE Governor, this framework brings in several new regulations and flexibilities in foreign exchange regime, which are anticipated to impact business operations, investment, and financing activities nationwide.
Ethiopia has maintained a strict foreign exchange regime for over three decades, with the NBE setting exchange rates and regulating foreign currency transactions and payments. The country has been grappling with persistent shortages of foreign currency. Countries like Ethiopia, which heavily depend on imports encounter difficulties in acquiring essential goods due to the scarcity of foreign currency leading to higher domestic prices for goods and services and contributing to inflation. Meeting foreign debt payments also becomes challenging, potentially resulting in a debt crisis and negatively impacting the country's credit rating. This dismal economic situation normally deters foreign investors from investing in a country where currency shortages pose a risk to the realization of their returns. Companies relying on imported raw materials or machinery experience operational disruptions, reduced production, and increased costs. Acutely aware of this, policy initiatives have recently been introduced by the NBE to progressively relax controls on foreign exchange and enhance its availability for the private sector, aiming to rectify existing imbalances. A series of gradual liberalization measures have been put into effect. However, despite these efforts, the acute shortage of currency persisted, leading to severe foreign currency shortages, hyperinflation, and a significant decline in living standards. In July 2024, the Government has made a huge leap of faith by introducing a groundbreaking shift in economic policy by unveiling a comprehensive reform of the foreign exchange regulatory regime, marked by the liberalization of its foreign exchange market. The NBE enacted the Foreign Exchange Directive to implement this policy reform.
The Foreign Exchange Directive aims to establish a well-functioning foreign exchange market with clearly specified rules, roles, and responsibilities, that are critical for promoting trade, financial stability, and economic growth. As an objective, the Directive seeks to create a more open and competitive market, with the expectation of attracting substantial foreign exchange inflows, ensuring efficient resource allocation, and fostering greater transparency in foreign exchange transactions. Additionally, the Directive has consolidated various preceding directives on foreign exchange into one comprehensive framework.
Key Elements of the Directive
- Market-based foreign exchange system: Key among the multitude of changes introduced under the Foreign Exchange Directive is the authorization of banks to buy and sell foreign currency to clients and among themselves at freely negotiated rates. The FX rate fixation rule of the Directive FXD/60/2018 on Fixation of the Daily Foreign Exchange Cash Notes and Transaction Rate, which mandated that the margin between a bank's buying and selling rate not to exceed 2% of the NBE's interbank foreign exchange market indicative buying rate and allowed banks to purchase foreign exchange from retention account holders at a negotiable rate not exceeding the day's selling rate, has now been abolished. Additionally, the Directive permits non-bank foreign exchange bureaus to buy and sell foreign currency cash notes at negotiable rates, a significant shift from the previous NBE Directive FXD/07/1998, a Directive to Transfer NBE's Foreign Exchange Functions to Commercial Banks. Independent (non-bank) foreign exchange bureaus are now recognized under specified conditions, and representatives of international remittance service providers have wide discretion in their operations, including the free advertising of remittance services. In accordance with the Directive's conditions and with approval from the NBE, selected local merchants can now accept payments in foreign cash notes.
- Surrender requirement: The FXD/83/2023 on Foreign Exchange Surrender Requirements of Banks previously mandated banks to surrender 50% of export receipts, 70% of private transfers (remittances), and NGO transfers to NBE each month. The Foreign Exchange Directive now permits exporters and commercial banks to keep a larger portion of foreign exchange, easing these strict requirements. Exporters of goods and services can now retain 50% of their foreign currency earnings in their FX Retention Accounts, while the remaining 50% can be converted at freely negotiated rates. This is a departure from the regulations outlined in FXD/84/2023 on Retention and Utilization on Export Earnings and Inward Remittances, which only allowed exporters to retain 40% of their earnings.
- Foreign currency carrying limits: The Foreign Exchange Directive also revises the foreign currency carrying limits, increasing the threshold for declaring foreign currency upon entry into Ethiopia from USD 4,000 to USD 10,000, a significant change from FXD 87/2024 on Limits on Birr and Foreign Currency Holding in the Territory of Ethiopia.
- Foreign currency accounts: The Foreign Exchange Directive allows Ethiopian residents, including individuals and not-for-profit organizations, as well as non-resident Ethiopians and foreign nationals of Ethiopian origin, to be eligible to open FCY accounts. This marks a departure from the previous rule, which only allowed non-resident Ethiopians and foreign nationals of Ethiopian origin to open such accounts.
- Capital Repatriation: The Foreign Exchange Directive authorizes the NBE to maintain strict control over capital accounts and capital repatriation for residents, allowing banks only specific exceptions. The Directive specifies that registered foreign investments can repatriate capital derived from profits and dividends accrued from investments, proceeds from the sale or liquidation of an enterprise, proceeds from the transfer of shares or ownership of an enterprise, the return of investment if operations cannot commence, and profits from portfolio investments in equity or debt securities, only with NBE approval and the required documentation.
- Lifting import restrictions: Foreign Exchange Directive repeals the circular issued by the Ministry of Finance in October 2023, that imposed foreign currency restrictions on 38 product categories. Today, June 30, 2024, the Ministry issued a new circular lifting all restrictions except for those related to vehicles using gasoline.
- External loan: The Directive abolishes the interest rate ceilings on private sector borrowing from abroad that were set by FXD 82/2022 on External Loan Suppliers Credit, enhancing flexibility in financing.
- Foreign currency allocation: The Directive further eliminates the waiting list system for foreign currency allocation previously required under FXD/77/2021 on transparency in foreign currency allocation and foreign exchange management, allowing banks more flexibility and discretion in allocating foreign exchange. This could streamline import processes and reduce bureaucratic delays.
- Special Economic Zones (SEZs): Companies operating in Special Economic Zones (SEZs), as established under FXD/59/2019 on Foreign Exchange Transactions for Industrial Parks, now benefit from full retention and repatriation of foreign exchange earnings, unrestricted foreign currency transfers, and the ability to conduct transactions in foreign currency. These benefits are in line with the mandate granted to the NBE under Proclamation 1322/2024.
- Foreign portfolio investments: The Foreign Exchange Directive also permits regulated foreign portfolio investments in Ethiopia’s Capital Markets through licensed exchanges, setting specific limits and criteria established by the NBE and the Ethiopian Capital Markets Authority.
With measures such as the liberalization of exchange rates, relaxed surrender requirements, increased foreign currency carrying limits, and broader participation in foreign exchange transactions, the Foreign Exchange Directive aims to enhance the efficiency, transparency, and competitiveness of Ethiopia's forex market. Moving to the next section, we will explore the regulatory landscape, highlighting the pivotal changes introduced by the new Directive.
Scope
The Directive applies to all foreign exchange transactions as outlined in the NBE Establishment Proclamation. Foreign exchange transactions encompass the transfer, borrowing, lending, assignment, exchange, purchase, sale, receipt, payment, or crediting of foreign exchange, as well as the execution of any contract, agreement, arrangement, or understanding that leads to such activities, whether conducted within or outside of Ethiopia. The Foreign Exchange Directive regulates these transactions, allowing for foreign exchange purchases and cross-border payments related to current account transactions unless stated otherwise. It limits capital account transactions except for those expressly permitted under the Directive.
Market Based Foreign Exchange System
Banks and authorized foreign exchange dealers are now permitted to engage in buying and selling foreign currencies with their clients and among themselves at freely negotiated rates. Non-Bank entities will also be allowed to participate in the purchase and sale of foreign currency notes. A new Guideline for foreign exchange trading will be issued to regulate these transactions. Under the Foreign Exchange Directive, banks are required to report the exchange rates used in their daily foreign exchange transactions to the NBE by the end of each day, following a format specified in the forthcoming Guideline. This represents a significant shift from previous practices, where the NBE dictated the daily exchange rates. Although it's still uncertain how this liberalization will impact the economy from different angles, this move towards freely negotiated rates in Ethiopia aligns with the trend observed in other jurisdictions where foreign exchange rates are influenced by market forces. Nigeria introduced the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) window in April 2017, which allows for a more market-driven determination of exchange rates. Similarly, India has allowed banks to set their own rates for buying and selling foreign currency since the liberalization of its foreign exchange market in the 1990s, with oversight and reporting to the Reserve Bank of India (RBI) ensuring transparency. Brazil employs a relatively free-floating exchange rate system where market forces primarily determine the rates, with occasional intervention by the central bank to maintain stability. Kenya also allows banks to negotiate exchange rates freely, following the liberalization of its foreign exchange market in the early 1990s. In Ethiopia, this shift represents a change from previous practices where the NBE dictated the daily exchange rates. Now, banks and authorized dealers can engage in buying and selling foreign currencies at negotiated rates, with the requirement to report these rates to the NBE by the end of each day in a specified format under the new Foreign Exchange Directive.
Forex Bureau Operations
The National Bank Establishment Proclamation stipulates that individuals are prohibited from engaging in foreign exchange transactions except through banks, authorized dealers, or with special permission from the National Bank. Consequently, due to the stringent regulations governing forex transactions, banks have primarily handled these activities. Deviating from this, the Foreign Exchange Directive now permits non-bank entities, including independent foreign exchange bureaus, to engage in specific areas of the foreign exchange market, such as the buying and selling of foreign currency notes and other designated operations. The Foreign Exchange Directive allows these entities to operate either as specialized units within banks or independently. Furthermore, the Directive outlines the necessary requirements for forex bureaus, encompassing licensing criteria, security measures, transaction processing protocols, naming conventions, staff responsibilities, transaction management, the establishment and display of exchange rates, and the permissions required for foreign exchange sales.
Any established business entity, regardless of its legal form or ownership (whether Ethiopian resident, foreigner, or foreigner of Ethiopian origin), that meets the minimum capital requirement of 15,000,000 and provides a security deposit of 30,000,000 in a blocked account, is now eligible to obtain a forex bureau license. This license permits the entity to engage in the buying and selling of foreign currency cash notes.
Capital Repatriation
Capital account transactions by investors are strictly regulated under the Foreign Exchange Directive, with the NBE holding the authority to approve or reject such transactions. Registered foreign investments are allowed to repatriate certain funds which are listed in the Directive, including profits, dividends, liquidation proceeds, and investment returns, after obtaining prior approval from the NBE. However, the Foreign Exchange Directive does not cover payments related to capital reduction or the sale of a business, though these transactions are allowed for repatriation by the Investment Proclamation. It may be necessary to introduce some degree of flexibility in enforcing these rules since the list of capital account transactions detailed in the Directive is not exhaustive. To facilitate capital repatriation, investors must submit various documents, such as board minutes, financial statements, tax receipts, and a registration letter from the NBE to ensure compliance with Ethiopian laws. The rules of the Directive are not applicable for pending payments. Further, the Directive provides that the NBE will establish a special repayment schedule for any outstanding dividend repatriations pending at the time of the Directive's issuance.
External Loans and Supplier’s Credit
The Foreign Exchange Directive upholds the already existing rule that no foreign loan can be entered into without prior consultation and registration with the NBE for government entities and prior approval for all other borrowers. This Directive mirrors the registration and approval protocols established in the previous External Loan and Suppliers’ Credit Directive FXD/82/2022. It delineates the procedure for loan registration and emphasizes that repayment in foreign currency is contingent upon this registration. The categories of eligible borrowers remain consistent with those outlined in the earlier Directive. Various borrower categories, such as exporters, domestic manufacturers, agricultural machinery importers, and companies in the construction sector, continue to be permitted to secure external loans. The established debt-to-equity ratio of 60:40, applicable to registered capital (with foreign capital for foreign investors), remains unchanged. A notable modification introduced by this new Directive is the removal of restrictions on all-in-cost ceilings, which encompass interest rates and associated fees. Consequently, parties are now at liberty to negotiate the applicable interest rates and fees for their transactions. Nevertheless, the overall loan arrangement, including all relevant fees, interest rates, and repayment terms, still requires prior approval from the National Bank of Ethiopia. The manner in which the NBE will implement this change—whether flexibly or restrictively—remains to be seen. Nonetheless, this represents a significant advancement aimed at facilitating foreign debt financing transactions, which are essential for many private entities and large-scale investments. Additionally, the Foreign Exchange Directive governs external loans in kind, mandating registration with the NBE and compliance with transparency and documentation standards to ensure the appropriate utilization of capital goods.
Offshore Accounts
The Foreign Exchange Directive upholds the longstanding prohibition against the establishment of offshore accounts, a regulation that has been effective since 1977. According to the Directive, no Ethiopian national, whether an individual or a legal entity residing in Ethiopia, is allowed to own, hold, or manage a foreign currency account abroad unless explicitly authorized by NBE. Nevertheless, recent exceptions introduced under the NBE Directive for Offshore Account Opening and Operations for Strategic Foreign Direct Investment No. FX 86/2023 remain in effect. The Foreign Exchange Directive does not alter the existing provisions concerning special allowances for offshore accounts. It establishes a framework that permits strategic foreign direct investment projects to open offshore accounts, particularly for significant initiatives in sectors such as power generation, infrastructure, and mining. This Directive allows strategic FDIs to utilize offshore accounts for the deposit of equity and debt financing earnings. It appears that all other earnings, apart from equity and debt financing, are expected to be deposited into an onshore foreign currency account belonging to the company.
The concept of convertibility guarantees has been integrated into the Directive to ensure that other earnings that are deposited into the onshore account. The offshore accounts may be utilized for external debt servicing, insurance claims, capital expenditures, and operational costs. Furthermore, the Foreign Exchange Directive stipulates a maximum debt-to-equity ratio of 80:20 for these projects, while also granting the NBE the authority to provide special approvals on a case-by-case basis.
The foreign currency convertibility guarantee is applicable for loan repayment and dividend repatriation. The convertibility guarantee will only be applicable after the project owner has exhausted all means to purchase foreign exchange from banks and will never take precedence over the servicing of sovereign external debt. The criteria for determining when an entity has reached the point of exhaustion and what constitutes sufficient evidence of such efforts remain ambiguous. Additionally, the duration for which a company must wait before claiming this guarantee after exhausting all options is also unclear. Furthermore, it is uncertain how to confirm that a request for convertibility will not interfere with the requirements for servicing a sovereign loan. The NBE may need to clearly outline the conditions and mechanisms that prioritize convertibility. Otherwise, the decision will be left to the discretion of the NBE, which may lean towards prioritizing sovereign loan servicing over convertibility requests. Although the liberalization of the foreign exchange market may alleviate some concerns regarding the implementation of these provisions, it remains essential to clarify these issues and establish definitive guidelines.
Foreign Portfolio Flows
The Foreign Portfolio Flows section regulates the participation of foreign investors in Ethiopia’s capital markets. Foreign portfolio inflows are permitted but must adhere to specific regulatory requirements set by the NBE and the Ethiopian Capital Markets Authority (ECMA). This includes participation through licensed securities markets, compliance with limits on ownership shares, and mandatory investment periods.
Foreign Currency (FCY) Accounts
The foreign Exchange Directive outlines a structured framework for the establishment and management of various types of foreign currency (FCY) accounts in Ethiopia, categorized into three distinct groups: accounts for foreign entities, accounts for Ethiopian residents and non-residents, and retention accounts for exporters.
Foreign Currency Accounts for Foreign Entities: The Foreign Exchange Directive permits eligible foreign entities, such as foreign direct investment (FDI) firms, international organizations, embassies, and foreign non- governmental organizations (NGOs), to establish and manage non-resident foreign currency (FCY) accounts. These accounts may be maintained across various banks, and transfers of funds can occur freely without the necessity of obtaining approval from NBE. Previously, the NBE used to apply a limitation whereby a company could only possess one non-resident FCY account at any given time unless it obtained special permission from the NBE. Companies were also required to convert all foreign currency holdings into Ethiopian Birr (ETB) and close their accounts in order to open a new non-resident FCY account at a different bank. The elimination of this restriction will facilitate the management of foreign currency for investors and provide them with the flexibility to engage with multiple banks simultaneously. These foreign exchange accounts can receive foreign currency from international sources, payments from residents within the permitted limits, and transfers from other non-resident foreign exchange accounts. Historically, banks have restricted these accounts to funds sourced solely from equity or debt financing, as 100% of the foreign currency earnings deposited would be retained. The new Directive appears to introduce greater flexibility in this area. However, it remains uncertain which types of foreign exchange transfers from abroad will practically be permitted for crediting to these accounts. Specifically, it is unclear whether export earnings can be deposited and if the surrender requirement will apply. In addition, holders of FCY accounts for foreign companies, international organizations, embassies, and foreign NGOs may utilize these accounts for all foreign payments without any restrictions.
FCY Accounts for Ethiopians and Ethiopian-Origin Foreign Nationals: Ethiopian residents, including individuals and not-for-profit organizations, as well as non-resident Ethiopians and foreign nationals of Ethiopian origin, are eligible to open FCY accounts. The Foreign Exchange Directive upholds the existing regulations under FXD/68/2020 and FXD/69/2021, allowing Ethiopian residents, including individuals and not-for-profit organizations, as well as non- resident Ethiopians and foreign nationals of Ethiopian origin, to be eligible to open FCY accounts. These accounts can be current, savings, or time deposit accounts, and funds can be credited from various sources, including international transfers, foreign currency cash deposits, and checks. The Foreign Exchange Directive permits such FCY accounts for residents and non-residents to be credited through various channels.
Transfers from accounts abroad, processed via the banking system, foreign currency received through international remittance service providers can be deposited, provided it is retained in foreign currency terms, thereby preserving the value of the remitted funds. Residents of Ethiopia are also allowed to receive foreign currency in their FCY accounts for income such as salaries or rental earnings earned abroad, facilitating the direct deposit of international earnings without conversion losses. Checks from abroad or issued locally in foreign currency can be deposited into such FCY accounts, integrating international and domestic check payments into the local banking infrastructure. Deposits can also be made through international payment cards, including credit and debit cards. Intra-Ethiopian transfers between FCY accounts are also permitted. Deposits of foreign currency cash notes are allowed, though amounts exceeding USD 10,000 or the equivalent in other convertible currencies require a signed and sealed declaration form from the Ethiopian Custom Authority. Though the Directive provides different ways to credit the account, it does not regulate what types of payments can be made from this account. However, given that the restrictions regarding foreign currency payments have been generally lifted, it is possible that any foreign currency payment can be made as long as the documentary requirements are met. Nonetheless, this is yet to be tested in practice.
Non-Resident Transferable Birr Accounts (NRT) and Non-Resident Non-Transferable Birr (NR-NT) Accounts have been removed. These accounts were commonly used by not-for profit organizations and all foreign currency deposited to these accounts used to immediately be converted to ETB.
Retention Accounts for Exporters: Exporters of goods and services can open FCY retention accounts to hold their foreign exchange earnings. The Foreign Exchange Directive specifies the conditions for crediting these accounts, as detailed in section 6. It mandates that the funds in these accounts be used in accordance with specific regulations outlined in the Foreign Exchange Directive. Banks are tasked with ensuring compliance with these guidelines.
Industrial Parks, SEZs and FX regulation
The Foreign Exchange Directive outlines that investor in Industrial Parks, whether they are SEZs or not, have enhanced flexibility concerning the purchase and sale of raw materials. The Foreign Exchange Directive reinstates the benefits of industrial parks as outlined in FXD/59/2019 on Foreign Exchange Transaction in Industrial Parks. As per the Foreign Exchange Directive, investors can acquire raw materials from other investors within the same park or from different parks using foreign currency from their retention accounts or foreign currency accounts. Furthermore, the sale of manufactured products within or between Industrial Parks can also be conducted in foreign currency, with the proceeds being credited to the seller's retention account.
Foreign employees working in these Industrial Parks are entitled to receive their salaries in foreign currency, either directly from the investor’s foreign currency or retention account. Additionally, such employees can open a foreign currency account in a bank located within the Industrial Park, provided they submit relevant documentation, including a work permit and proof of salary. The Foreign Exchange Directive permits these employees to transfer funds abroad or convert them into Birr as needed, with the foreign currency account credited up to their net monthly salary. For the movement of goods, the Foreign Exchange Directive specifies that banks are authorized to issue interim export and import permits to investors. These permits are essential for the sale and purchase of raw materials across different Industrial Parks, and they must be coded with a specific bank-issued code.
Transactions conducted within SEZs can be executed in foreign currency, reinforcing the SEZs' role as hubs for international trade and investment. The Foreign Exchange Directive also emphasizes that the National Bank will establish guidelines for the operational standards and licensing requirements of financial institutions within SEZs to ensure regulatory compliance and support economic activities.
Remittance
In the context of remittance inflows, the FXD/74/2021 on International Remittance Service initially allowed, in addition to traditional banks, international remittance services to be provided by the Ethiopian Postal Service and payment instrument issuers. This scope has now been broadened with more permissive language to include telecom companies, payment system operators, and other similar entities. These organizations can utilize their payment systems, platforms, gateways, or physical branch networks to process remittance payments to beneficiaries. As was the requirement under FXD 74/2021, they must be designated and approved by the NBE to offer these services. These Authorized Remittance Service Representatives are permitted to offer remittance services using the correspondent accounts of one or more partner banks as well. The obligations of a representative of the international remittance service are outlined in detail under Directive.
The previous regulatory rules under FXD/74/2021 regarding a representative providing international remittance services are maintained. A representative is required to notify the NBE of all service locations and must ensure payments are made within 24 hours. They must perform customer identification and due diligence as per AML-CT laws and are liable for any improper disbursements by their sub-representatives. Further to this, representatives must also ensure remittance agreements comply with Ethiopian laws and obtain prior approval from the National Bank before entering into agreements with International Remittance Service Providers (IRSPs).
The requirements under FXD/74/2021 stipulating that contracts with International Remittance Service Providers (IRSPs) must be with licensed providers and not exceed four years are maintained under the Foreign Exchange Directive. Continuous monitoring of the IRSP's license validity is mandatory as well. Any IRSP contract amendments will require a ten-day prior notification to the National Bank. Agreements must include procedures to prevent money laundering and terrorist financing, and renewals also need National Bank approval.
Regarding the application requirements to offer remittance services, representatives must submit several documents, including an application letter, authenticated copies of the IRSP’s business license, a draft service agreement, addresses of pay points in Ethiopia, anti-money laundering measures, and for non-banks, an agreement with a partner bank. Representatives are prohibited from providing remittance services without an approved contract, assigning IRSP employees as liaisons or interpreters, and from having exclusive remittance service agreements.
International Debit or Pre-Paid Cards
The previous FXD/56/2018 has now been integrated into the new Directive. The Foreign Exchange Directive maintains that authorized banks in Ethiopia are permitted to issue international debit or prepaid cards, provided they secure membership or agreements with international payment card networks. Like FXD/56/2018, these cards must be issued through bank-affiliated forex bureaus, unless an exception is granted by the NBE. To issue these cards, banks must meet several requirements, including having card personalization capabilities, obtaining the necessary licenses, establishing a central payment system, and ensuring secure telecommunications infrastructure.
The Foreign Exchange Directive outlines that both bank-affiliated forex bureaus and authorized banks are permitted to issue travel allowances. It details the acceptable means and methods for issuing these allowances, in a manner similar to the rules specified in Directive FXD/56/2018 on Issuance, Use and Acceptance of International Credit/Debit Card, Foreign Currency Cash Notes and Travelers’ Cheques International Payment Instruments. Additionally, a non-exhaustive list of international cards is detailed in section 12.3.5, similar to FXD/56/2018 as well. The cards will be valid for up to two years, with options for renewal. While licensure was a requirement under FXD/56/2018, this is not explicitly stated in the Foreign Exchange Directive. To accept international cards, banks must have agreements with international payment networks and can provide encashment services. Local merchants who wish to accept international cards must partner with authorized banks to facilitate these transactions.
Handling and Accepting Cash Payments in Foreign Currency
Similar to the Directive FXD/56/2018, the Foreign Exchange Directive designates specific eligible entities to handle and accept cash payments. These entities include tourist-serving hotels (including those below three stars as verified by the Ministry of Culture and Tourism), duty-free shops, the Immigration Office, the Civil Aviation Authority, airline ticket offices, travel agents for air ticket sales, tour operators, airport shops beyond the immigration line, airport telecom services for SIM cards and airtime for tourists, fuel stations inside airports for foreign airlines not operating in Ethiopia, licensed guest houses, private airways providing charter services to tourists, and specialized hospitals and clinics catering to foreigners.
As was the case before, the NBE is the licensing body for accepting foreign currency cash notes, travelers' cheques, and using credit/debit cards for transactions, either collectively or individually. These licenses are strictly limited to the specified activities. To accept foreign currency, businesses or entities must submit an application to the NBE using the prescribed form. They must demonstrate they have qualified personnel, currency validation equipment, and only accept convertible currencies approved by the NBE. Local businesses or entities can apply to be included in the Retention Accounts Scheme and can be allowed to retain foreign exchange as provided under the Foreign Exchange Directive.
Cash Limits
The Foreign Exchange Directive introduces rules to manage and control the handling, conversion, and movement of foreign currency by Authorized Banks in Ethiopia. It mandates that authorized banks can hold a maximum of 10% of their paid-up capital in foreign currency cash notes as a working balance at the end of each month, requiring any excess to be surrendered to the National Bank within five working days.
For conversion, banks must provide detailed documentation, including a list of currency types, serial numbers, and denominations, when presenting cash notes for conversion. A service charge of 0.5% is levied if the proceeds are credited to a correspondent bank account, and any trading margin costs are to be debited from the bank’s Reserve Account with the National Bank. If banks opt to sell foreign currency notes to the National Bank in Birr, the purchase is made based on the Indicative Daily Exchange Rate, with no additional charges. Section 22.5 of the Directive establishes a prohibition against shipping foreign currency cash notes abroad or ordering consignment.
For individuals, the Foreign Exchange Directive sets limits on holding Birr when entering or departing Ethiopia, with a maximum of Birr 3,000 per travel and up to Birr 10,000 for travel to Djibouti or nearby port cities. Foreign currency brought into Ethiopia must be converted into Birr or deposited into a foreign currency account within 30 days, with customs declaration required for amounts exceeding USD 10,000. Foreign nationals of Ethiopian origin or Ethiopians not residing in Ethiopia must deposit foreign currency into a Non-resident Foreign Currency Account within 90 days if staying longer than 90 days, with similar customs declaration requirements for amounts over USD 10,000. Foreigners not residing in Ethiopia may hold foreign currency until their visa validity period, while residents must convert purchased foreign currency into Birr within 30 days of the bank advice.
Customs Declaration of FCY
The Foreign Exchange Directive reestablishes the obligation to declare foreign currency and the reporting requirements to the Customs Commission, as detailed in the Directive FXD 87/2024 Limits on Birr and Foreign Currency Holding in the Territory of Ethiopia, and mandates that these reports be submitted to the NBE.
The Ethiopian Customs Commission is tasked with sending monthly reports of all foreign currency customs declarations to the National Bank within the first five working days of the following month and must submit additional reports as requested by the National Bank. The Foreign Exchange Directive also includes stringent prohibitions: without National Bank authorization, individuals are barred from transferring foreign currency in cash to third parties, holding or carrying foreign currency beyond specified limits, and undertaking cash transactions in foreign currency within Ethiopia, except for specific cases authorized by NBE.
Further, the Foreign Exchange Directive sets rules governing the handling and reporting of foreign currency by individuals entering or departing Ethiopia, as well as for those traveling abroad. According to the guidelines, any person whether a resident, a foreign national of Ethiopian origin, an Ethiopian national, or a foreigner not residing in Ethiopia carrying foreign currency exceeding USD 10,000 or its equivalent in FCY must complete a Customs Declaration Form upon arrival at the airport or other entry points into Ethiopia. Those carrying amounts not exceeding USD 10,000 are exempt from this declaration requirement. Additionally, transit passengers are not required to declare their foreign currency holdings.
When traveling abroad, Ethiopian residents are permitted to carry foreign currency if they present a bank advice issued within the past 30 days for the purchase of that currency. Non-resident foreign nationals of Ethiopian origin and Ethiopian nationals not residing in Ethiopia may also carry foreign currency, provided they present a bank advice from within the last 30 days or a customs declaration if the amount exceeds USD 10,000. Specific provisions apply to embassy employees, temporary workers, and workshop participants, who must provide proof that the foreign currency is legally acquired. For those entering Ethiopia from neighboring countries via land transport, if the foreign currency exceeds USD 500, it must be declared at border customs stations. The customs declaration allows for the carriage of the declared amount when traveling abroad.
Potential Benefits for Investors
- Enhanced Flexibility and Market Access: The Foreign Exchange Directive introduces a more flexible and open market for foreign exchange, allowing banks to buy and sell foreign currency at freely negotiated rates. This change grants investors greater control over their transactions, reducing reliance on fixed rates and enabling them to respond swiftly to market conditions. Investors can also negotiate conversions with commercial banks, selecting the most favorable rates in the market.
- Increased Retention and Repatriation: Investors in the export sector can now retain 50% of their foreign currency earnings, up from the previous 40%. This increased retention capacity enables better management of foreign currency needs, encouraging reinvestment and covering operational expenses in foreign currency.
- Simplified Import and Financing Processes: The liberalization of the foreign exchange market will alleviate the foreign currency shortage, which has heavily impacted on the import and manufacturing sectors. The removal of import restrictions on 38 product categories and the abolition of interest rate ceilings on private sector borrowing streamline import processes and financing activities. These changes reduce bureaucratic delays and enhance the ease of doing business, encouraging further investment.
- Expanded Foreign Currency Account Eligibility: Residents are now permitted to open foreign currency accounts, a significant departure from previous restrictions. This expansion allows for greater financial flexibility and supports seamless management of international transactions and savings. The Foreign Exchange Directive also broadens the scope of permissible foreign currency holdings, offering better flexibility to individuals and foreign employees in Ethiopia.
- Improved Investment Climate in Special Economic Zones and Incentives for Strategic Investments: Companies operating in SEZs benefit from full retention and repatriation of foreign exchange earnings, unrestricted foreign currency transfers, and the ability to conduct transactions in foreign currency. These incentives attract foreign investment and support the development of SEZs as hubs of economic activity. The Foreign Exchange Directive also allows strategic foreign direct investment projects to open offshore accounts for large-scale projects in sectors like power generation, infrastructure, and mining, enhancing Ethiopia’s attractiveness as an investment destination. These accounts support external debt service, capital expenses, and operational costs, facilitating significant investments.
- Strengthened Remittance Services and Forex Bureaus: The Foreign Exchange Directive broadens the scope of remittance services, permitting telecom companies, payment system operators, and other entities to offer these services. This expansion increases competition and ensures that more funds are channeled into the formal financial system, benefiting both senders and recipients. Authorized banks can now engage in foreign currency transactions with greater ease and flexibility, simplifying cross-border payments and foreign exchange dealings, and supporting the smooth operation of businesses engaged in international trade.
Overall, FXD/01/2024 represents a significant overhaul of Ethiopia's foreign exchange regulations, aiming to liberalize and streamline the market. By allowing more flexibility in currency transactions, increasing export retention rates, and easing import restrictions, the Foreign Exchange Directive is set to boost economic activity and attract foreign investment. The changes are expected to improve market efficiency. Nevertheless, the effectiveness of these changes will rely on the successful execution, robust supervision, and the implementation of accompanying measures to address any possible adverse consequences.