Update on NBE Foreign Exchange Directives 2018/2019

Introduction

 The National Bank of Ethiopia (“NBE”), through the powers vested on it by law, enacts directives from time to time regulating, among others, transactions in foreign exchange. Since late 2018 and throughout 2019, several new directives were enacted regulating the foreign exchange regime in Ethiopia. In this issue of our legal update, we have prepared a summary of the main changes introduced by these new legislations. (For update on directives in the year 2016/2017, please click here).

1. Transparency in Foreign Currency Allocation and Foreign Exchange Management Directive No. FXD /62/2019 (“Forex Directive”)

The Forex Directive repealed the Foreign Currency Allocation and Foreign Exchange Management Directive No. FXD 58/2018.  The Forex Directive introduced the following new changes:

• Change in Priority List: the availability of and access to foreign currency is determined based on the Forex Directive that lists priority sectors. Priorities range from First to Fourth in which forex will be available depending on the priority list to which the required payment belongs. While most of the priority lists under the previous directive remain the same, the Forex Directive has moved “profits and dividends” of investors from third priority to second priority. This is a positive step for foreign investors that will ease the repatriation of their profits and dividends as a matter of higher priority.   Further, transfer of excess sales of foreign airlines was similarly moved from third priority list to the second priority list.

• Expanded Power to Governors: The Forex Directive mandates the Governor and Vice Governor of the Monetary Cluster of NBE to grant special priority approval of forex to applicants on case by case basis. Such discretionary power was not granted to the Governors previously. Further, the Governor and Vice Governor of the Monetary Cluster Unit of NBE are entrusted to waive restrictions and prohibitions imposed on commericial banks on a case by case basis.

• New powers to Commercial banks: NBE directives prohibit commercial banks from  issuing permit for goods shipped before approval, after expiry of L/C and purchase order. However, the Forex Directive grants the president of commercial banks with a power to grant approval to issue import permit even after the expiry of L/C and the purchase order.

• Inability to decline registration request: the commercial banks are prohibited from declining registration request by an importer except in the event when more than two proforma invoices including those requests in the awaiting list are presented for registration. 

2. Regulation of External Loan in Kind Directive No. FXD/61/2019

Previously, the NBE only permitted foreign investors and exporters to obtain foreign loan in cash. This new directive, enacted on May 31, 2019, expands the ability of investors to obtain external loan in kind. Both in terms of substance and form, this Directive is similar to the directive on External Loan and Supplier Credit No. XD 47/2017. 

• Definition: external loan in kind is defined as acquisition of capital goods from an eligible foreign lender. Capital goods are any equipment or machine that may be used to produce products or to provide services including accessories.

• Eligible borrower: the Directive an illustrative list of eligible investors that may obtain foreign loan in kind. These are: (a) exporters, (b) foreign investors and (c) domestic investors who are engaged in projects that generate foreign exchange.

• The Lender: the directive requires the acquisition of the goods to be made from an eligible foreign lender in the form of sale with differed payment, lease agreements or other arrangements. It is implied from the directive that the lease arrangement shall be in the form of a hire-purchase.

• Approval and registration- prior to entering into an external loan in kind agreement (“Agreement”), the borrower must receive an approval from the NBE by following the procedures. If the loan is received through a lease agreement, the lease agreement will be registered at the relevant government organ. Any foreign loan that did not fulfill the approval and registration procedure will not receive access to forex at the time of repayment.

• Interest rate: the directive provides the same interest rate applicable for external loan in cash and puts the all-in-cost celling (rate of interest, other fees and expense) for external loan in kind. It is important to note that the other laws regulating lease financing are applicable for acquiring external loan in kind through the lease agreement. 

3. Foreign Exchange Transactions in Industrial Parks Directive No. FXD/59/2019

• Transaction in Forex: under the National Bank Establishment Proclamation, all monetary transactions must be recorded and settled in Birr unless the NBE permits otherwise. The new Directive allows investors to purchase raw materials or inputs that are manufactured by other investors with in the same industrial park or between industrial parks using their own foreign currency account or their retention account. Likewise, investors are also allowed to use foreign currency to sell products manufactured in the industrial park that can be used as an input to another investor within the same industrial park or across another park.

• Interim Import/Export Permits: Commercial banks may issue interim export permit for investors who sell their products as a raw material to another investor within the same industrial park or another investor in different industrial park. Similarly, investors that buy raw materials from another investor within the same or different industrial park can acquire an interim import permit from banks. In both cases, investors are required to submit all relevant export and import documents before the banks and the permits must have specific codes given by banks. 

• Expat Salaries: the Directive permits investors in industrial parks to effect salary payment of expat employees through foreign currency from their retention account or foreign currency account. In addition, a foreign employee can open foreign currency account in the bank situated within the industrial park after submitting the required documentation. However, the foreign currency account retained by expat employees can be credited to the maximum of net monthly salary of the employee except benefits such as the value of free accommodation gratuity and accommodated leave pay.  

4. Fixation of the Daily Foreign Exchange Cash Notes and Transaction Rate (as amended) Directive No. FXD/60/2019

This Directive repealed and replaced the 2014 Directive on Fixation of Daily Foreign Exchange Transactions No FXD/43/2014 with the aim to create competition between banks. The new Directive maintained the rules provided under the older directive relating to rates of foreign exchanges for both cash and transactions. Accordingly, the foreign exchange buying rate for banks is NBE’s interbank foreign exchange market indicative buying rate of the day. However, as a new introduction, the Directive provides that the margin set between the selling and buying rate of the bank may not exceed 2% from the rate set by NBE for interbank foreign exchange market. The Directive obligates banks to post the buying and selling rate at visible place and to use such rate throughout the day.

Further, the directive introduced a new rule that permits banks to buy foreign exchange from retention account holders and to negotiate the rate, without exceeding the selling rate of the day.  Under the amended directive, the commercial banks are obliged to buy foreign currency from retention account holders with a buying rate determined by the national bank. This is important for exporters with a retention account whose foreign exchange would expire if not used within 28 days. 

5. Transfer of National Bank of Ethiopia’s Foreign Exchange Functions to Commercial Banks (Amendment) Directive No. FXD 63/2019 

This directive amended two previous directives that were issued in 1998 and 2000. The changes introduced are related to import and export authorization requirements. The new directive no longer provides different import permit procedural requirements between the Commercial Bank of Ethiopia and other commercial banks. Accordingly, all authorized commercial banks are mandated to permit import and export of goods for any value, excluding coffee. In doing so, commercial banks are required to check that the import application for import of goods with a value of or greater than USD 1,000,000 (USD One Million) are supported by relevant international competitive bid documents (ICB). ICB is not required for import of goods by the Ethiopian Government and public enterprises. Regardless of the USD 1 million threshold, NBE’s Governor and Vice Governor of Monetary Stability Cluster have the authority to grant special approvals on a case by case basis. 

6. International Remittance Service (as amended) Directive No. FXD 58/2018 

This directive amended the International Remittance Service (as amended) Directive No.FXD 30/2006. Under the previous directive, it was permitted for non-financial organizations such as the Ethiopian Airlines, the Ethiopian Shipping Lines and international money transfer operators   to provide international remittance services in collaboration with banks. However, the new directive has restricted this rule to allow only banks and the Ethiopian Postal Service to provide remittance services in association with International Remittance Service Provider (“IRSP”). IRSP is an internationally licensed business organization that provides money-transferring services in association with a bank or the Ethiopian Postal Services (collectively referred to as “Representatives”). 

• Obligations of Representatives: the Representatives are obliged to, among other things, to notify the NBE of all the locations in which they provide services; provide payment within 24 hours to the beneficiary in birr at the prevailing exchange rate; undertake “know your customer” due diligence on customers and efficiently use SWIFT system. Representatives are also liable for improperly disbursed funds by any sub-representatives and cannot charge fees that exceed 1% of the transferred money. Previously, there was a minimum fee but did not provide a maximum cap; and acquire a prior approval from the NBE before entering into an agreement referred to as a ‘Remittance Service Representation Agreement’ with an IRSP. 

• Remittance Service Representation Agreement: the term of the contractual agreement between the Representative and the IRSP is from two years to a maximum of four years. The Representative has the responsibility to follow up the validity of the IRSP’s license during the contract period. The directive has also annexed a sample agreement to be used by the parties in a scenario where the IRSP operates in less than 50 countries. The agreement cannot include exclusivity terms. Furthermore, the IRSP is not permitted to assign its employee as liaison officer or interpreter at the premises of the Representative or pay point. Any amendment and renewal of the agreement requires the prior approval of the NBE. 

7. Establishment and Operation of Foreign Currency Account for Non-Resident Ethiopians and Non-Resident Ethiopian Origin (as amended) Directive No. FXD 64/2019 

This directive has repealed the Foreign Currency Account for Non-Resident Ethiopians and Non-Resident Ethiopian Origin Directive No. FXD 55/2018. It regulates the requirements and procedures for non-resident Ethiopians and non-resident foreign national Ethiopians to open and operate a foreign currency account in Ethiopia.

• Types of account: the directive permits three types of foreign currency accounts that may be opened by non-resident Ethiopians and non-resident foreign national Ethiopians. (a) Fixed account: an account where customers deposit a certain amount and can only make withdrawals after its maturity period. The minimum maturity period of the fixed accounts is three months. (b) Current Account: takes the form of current deposits where withdrawals may be made at any time upon demand. (c) Non-repatriable Birr Account: takes the form of saving deposit that can be used for local payments only.

• Crediting of Accounts: the directive expanded the mode of crediting the foreign currency accounts of non-resident Ethiopians. Previously, it is only the account holder that may credit the foreign currency account through a banking system. With the new directive, the foreign currency account of a non-resident Ethiopian may be credited by the individuals/entities, a spouse or employer of the account holder, business entity owned by the account holder or any other entity as per a valid contractual agreement. Authenticated documents that corroborate such an arrangement must be presented.

• Use of Accounts: the previous directive had permitted the transfer of foreign currency from one foreign currency account to another foreign currency account. However, the new directive has removed the ability to transfer between accounts.

• Interest rates: Interests are not paid by banks on current account deposits. On the other hand, interest payments on fixed accounts are permitted and the previous directive provided that the interest rate paid on fixed accounts should not exceed the prevailing London Interbank Offered Rate (LIBOR). However, the new directive  provides the prevailing LIBOR the rate as the base line for interest rates on fixed accounts and gives banks the liberty to set their own interest rates. LIBOR is used as an internationally accepted benchmark interest rate that indicates borrowing costs between banks. Furthermore, the interest rate for non-repatriable Birr accounts was required to be double of the minimum saving accounts interest rate set by NBE. The new directive has amended this to provide that the banks are permitted to set their own interest rate on non-repatriable Birr accounts so long as the interest rate is not less than the minimum saving deposit rate set by NBE.

• Incentive for Diaspora International Remittance Providers: A Diaspora International Remittance Service Provider is a business organization, registered and licensed in a foreign country to provide money transfer service, owned by non-resident Foreign Nationals of Ethiopian Origin and/or non-resident Ethiopians and which provides inward remittance with a Representative based on authorized remittance service agreement.  Representative is a bank or Ethiopian Postal Service or any other financial institution to be determined by the NBE. 

Diaspora IRSP were not included in the list of entities that may open foreign currency account in Ethiopia. The current directive permits them to open and maintain a foreign currency retention account “A” as per the existing directive of the NBE on the Retention and Utilization of the Export Earnings and Inward Remittance Directive FXD 48/2017 (“Export Earnings Directive”).  Under the Export Earnings Directive, foreign currency retention accounts are maintained by eligible exports of goods and services and recipients of inward remittances. Accordingly, such accounts are credited only from export earnings and incoming transfer made for inward remittance recipients. 

For more information on this legal update, please contact Deborah Haddis or Abraham Rega