Unraveling Ethiopia's Forex: Four Decades of Transformation

The foreign exchange regime of Ethiopia has experienced gradual changes and openness over the past four decades. The size of the economy, the economic management system, the economic policy of the different governments in power, the structure and level of the economic development of the country, the performance of the external trade sector, and the balance of payments position of the economy have all influenced these changes.

Up until the early 70s, the country had a foreign exchange regime that was designed to serve the needs of a very small open economy. The simple managed foreign exchange regime stayed very static and unaltered for many years. However, with the change in government in 1974 that adopted a command economic management, the fixed foreign exchange regime was continued and made to suit the pursued economic philosophy of the socialist military government. Foreign exchange, like any other resource in a socialist economy, was channeled and directed to the various economic uses through an administrative mechanism.

To effect control on the allocation and utilization of the foreign exchange resource of the country, the then government issued a foreign exchange control regulation in 1977, which remained in force up to 1991. After the demise of this government and the advent of the EPRDF government, which by adopting a non-regulated economic system followed a market-oriented economic management, the foreign exchange regime, over the past fourteen years, has been liberalized in gradual steps in line with the successive economic and external sector reform measures.

The current foreign exchange regulations fully liberalize current account for international payments for various purposes. Accordingly, the regulations allow payments for all imports of goods, except goods that are believed to be detrimental to the health of the public and security of the nation. Payments for imports can be made by letter of credit, cash against documents, advance payment, etc. Imports of second-hand or used goods are also allowed, more specifically various used vehicles, machinery, and equipment, in which foreign exchange is availed to these items in relation to their service year after manufacture and the original FOB price.

Similarly, exports of goods and services are allowed through letter of credit, cash against documents, advance payment, consignment, etc., and payments for services associated with these exports are also permitted. Small items of limited value and quantity are also allowed to be exported without foreign exchange repatriation requirements.

With a view to encouraging and supporting the export sector, the foreign exchange regime allows exporters to open a retention account to hold a specified amount of their export earnings for a defined period and use their forex holdings for their export business promotion. A credit guarantee scheme is also made available to exporters to back the export sector.

Furthermore, the exchange regulations permit transfers for various services, including money drawn from Non-Transferable Accounts, Non-Resident Foreign Currency NR Fcy, Non-Resident Transferable Birr (NRT), Non-Resident Non-Transferable (NRNT). Exchange transactions also allow salary remittance by foreign employees, insurance payment, re-transfer of unutilized foreign currency holdings, etc.

Non-resident Ethiopians and non-resident foreign nationals of Ethiopian origin are permitted to open a foreign currency account at any authorized commercial bank in four major international currencies with a limited amount that shall be deposited in the current account. The deposits shall earn interest based on the arrangements made with commercial banks. On the other hand, no Ethiopian national resident in Ethiopia or resident Ethiopian company is allowed to maintain a bank account abroad without the National Bank of Ethiopia's authorization.

Payments through credit cards can be made for catering services and purchase of goods by travelers and tourists, and credit card holders can also obtain local currency from banks by making use of their credit cards. Foreign cash notes and travelers cheques are also acceptable for payments at hotels certified by the Ethiopian Tourism Commission, duty-free shop operators, Immigration Office, Civil Aviation Authority, and airline ticket offices.

Forex bureaus established at commercial banks are allowed to engage in the buying and selling of major convertible currencies, operate in spot transactions with immediate delivery of currencies bought or sold, sell and/or buy cash notes and travelers cheques at displayed exchange rates before any subsequent change.

Any capital inflow by foreign investors is recognized and registered at National Bank of Ethiopia at the initial stage of investment, including investments made through a concessionary or a partnership agreement with the government or with an autonomous institution and similar treatment is accorded to plowed back profits.

Capital gain on asset revaluation of a business enterprise may be repatriated by fulfilling the necessary requirements. Loan and suppliers credit obtained by investors are registered as capital inflows by National Bank of Ethiopia. Foreign investors who earn profits or dividends from recognized investments can repatriate their profits.

Commercial banks in Ethiopia play a crucial role in the foreign exchange market. They facilitate both incoming and outgoing foreign exchange transactions. Importers, exporters, individuals, and institutions that need foreign currency for various purposes apply to these banks.

Commercial banks, in turn, facilitate these transactions and play an intermediation role between the customers and the foreign exchange market. The banks are subject to guidelines and directives issued by the National Bank of Ethiopia, which stipulate how to manage foreign exchange transactions.

To promote competition among the commercial banks and to provide efficient service to the customers, the foreign exchange retention scheme has been introduced. Under this scheme, commercial banks are allowed to retain a certain percentage of their foreign exchange earnings. These funds can be used by the banks to meet their customers' demand for foreign currency.

Commercial banks also deal with the foreign currency black market, which has been a significant issue in the country. By offering competitive exchange rates and efficient service, the banks aim to attract more customers and reduce the volume of transactions in the black market.

The National Bank of Ethiopia plays a crucial role in the foreign exchange market. As the country's central bank, it is responsible for formulating and implementing the country's monetary and financial policies.

One of its significant roles is managing the country's foreign exchange reserve. This includes determining the amount of foreign exchange that should be held as reserves, deciding on the allocation of these reserves, and managing the risk associated with these reserves.

Another important role of the National Bank of Ethiopia is regulating the operation of commercial banks. This includes setting the guidelines and directives for foreign exchange transactions. The Bank also monitors the foreign exchange market and takes necessary measures to ensure its stability and efficiency.

In addition to its role in managing and regulating the foreign exchange market, the National Bank of Ethiopia also plays an important role in facilitating international trade. It provides foreign exchange for the importation of goods and services, supports the export sector, and promotes foreign investment.

The foreign exchange functions and transaction directives in Ethiopia have played a pivotal role in the country's economic development. The foreign exchange regime in Ethiopia, through various regulations, is designed to streamline the economy and stabilize the foreign exchange market. It is also crafted to boost export earnings, attract foreign direct investments, and promote financial stability. The central bank and commercial banks have significant roles in ensuring the effective execution of these regulations, contributing significantly to Ethiopia's economic growth.