Ethiopia's Evolving Forex And Analysis of its Transaction Directives

The foreign exchange regime of Ethiopia has undergone gradual changes and openness over the past four decades. The changes reflect the economic setting, 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.

Until the early 70s, the country had a foreign exchange regime that was designed to serve the needs of a very small open economy, and 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 where foreign exchange, like any other resource in a socialist economy, was channeled and directed to the various economic uses through an administrative mechanism.

The foreign exchange regime experienced significant changes after the advent of the EPRDF government, which adopted a non-regulated economic system and followed market-oriented economic management. Over the past fourteen years, the foreign exchange regime has been liberalized in gradual steps in line with the successive economic and external sector reform measures. As a result, numerous foreign exchange transaction liberalization steps have been undertaken in the foreign exchange regime of the country, albeit on a piecemeal basis.

The need to collate and compile these numerous amendments led to the production of consolidated foreign exchange transaction directives. More importantly, significant parts of the micro-management and operations function of foreign exchange transactions have been transferred from the National Bank of Ethiopia to commercial banks via directive No. FXD/07/1998 was issued on August 31, 1998.

The consolidated directives have six parts and are organized as follows:

• Part I contains the foreign exchange control regulation issued in 1977 where significant provisions of the regulation, especially those related to capital account control, are still intact and in force.

• Part II indicates amendments made to the exchange control regulation.

• Part III covers the directives, which transferred a major part of the micro foreign exchange functions from the National Bank of Ethiopia to commercial banks.

• Part IV shows the subsequent amendments made to directives No. FXD/07/1998 that shifted a considerable aspect of the micro-management of foreign exchange to commercial banks.

• Part V provides directives issued on various foreign exchange operations and transaction aspects that are carried out by commercial banks.

• The last part, part VI, contains amendments to the various foreign exchange functions and transactions directives.

These consolidated directives are believed to give detailed information on the foreign exchange transaction rules and procedures of the country and provide a better understanding of what the country's exchange regime is like. The directives are also expected to serve better the commercial banks, the business community, importers, exporters, foreign exchange sellers and buyers, economic agents and individuals who hold foreign currency accounts in domestic banks, those economic agents and individuals who require foreign exchange for various current international payments or transactions, etc. by making it possible to refer to one consolidated set of directives instead of having to go through the several fragmented pieces of regulatory foreign exchange legislations made over the past fourteen years.

The directives stipulate that all export proceeds must be collected within 28 days of the customs declaration date. Furthermore, these proceeds must be surrendered to a bank within the same time frame. This ensures a steady flow of foreign currency into the country's financial system.

Interestingly, exporters are allowed to retain 10% of their export earnings in a foreign currency account. This provides them with a degree of flexibility and encourages further export activities. They can use these retained earnings to import raw materials, which can boost their production capabilities. Moreover, they have the option to sell their retained earnings to other exporters at a premium, creating a unique market dynamic within the export sector.

The directives also govern the import of goods and services. All imports must be financed by a letter of credit (LC) or cash against documents (CAD). This ensures that the transactions are secure and that the parties involved are credible. Additionally, all imports must be insured by the Ethiopian Insurance Corporation, providing a safety net for importers.

Prepayment for imports is only allowed for government organizations and public enterprises. Just like exporters, importers are allowed to retain 10% of their import payments in a foreign currency account. They can also sell their retained earnings to other importers at a premium.

Foreign exchange bureaus play a crucial role in Ethiopia's foreign exchange regime. They are allowed to buy and sell foreign currency, providing a platform for individuals and businesses to exchange currencies. They can also engage in remittance services, facilitating the transfer of money domestically and internationally.

The directives set certain limits for transactions at foreign exchange bureaus. The maximum amount of foreign currency that can be sold to an individual per trip is USD 2,500 or its equivalent. Similarly, the maximum amount of Ethiopian birr that can be sold to an individual per trip is ETB 50,000.

The directives also regulate remittances. Outward personal remittances are limited to USD 50,000 per annum, while inward personal remittances are not limited. Outward business remittances, however, are subject to approval by the National Bank of Ethiopia.

The directives allow non-resident Ethiopians and foreign nationals of Ethiopian origin to open foreign currency accounts. Resident Ethiopians can also open foreign currency accounts for specific purposes such as education and medical treatment. The maximum balance of a foreign currency account is USD 50,000.

Foreign investors are given certain privileges under the directives. They are allowed to remit dividends and profits, principal and interest on foreign loans, and fees related to technology transfer. They can also remit proceeds from the sale or liquidation of assets, from the reduction of capital, and from the merger or division of an enterprise.

In conclusion, the transaction directives in Ethiopia's foreign exchange regime are comprehensive and designed to regulate the flow of foreign currency in and out of the country. They provide a framework for exports and imports, govern the operations of foreign exchange bureaus, and set rules for remittances and foreign currency accounts. By understanding these directives, businesses, and individuals can navigate Ethiopia's foreign exchange market more effectively.