Comprehensive Review of Ethiopian Foreign Exchange Directive FXD/01/2024

1. Introduction and Overview

The Foreign Exchange Directive FXD/01/2024, issued by the National Bank of Ethiopia (NBE), represents a significant update to Ethiopia's foreign exchange regulations. It aims to create a more open and competitive foreign exchange market while maintaining regulatory oversight. The directive consolidates various previous regulations and introduces new measures to liberalize aspects of foreign exchange operations in Ethiopia.

2. Structure of the Directive

The directive is divided into seven main parts, plus annexes:

1. General Provisions
2. Foreign Exchange Market Participants and Operations
3. Exports, Imports, and Services
4. Forex Bureau Operations, Remittances, and Payment Instruments
5. Foreign Currency Accounts
6. Capital Account
7. Miscellaneous Items

3. Key Aspects of the Directive

3.1 Exchange Rate Determination

• Banks and authorized forex dealers can buy and sell foreign currencies at freely negotiated rates.
• The NBE will compile and communicate an Indicative Daily Exchange Rate based on banks' submissions.
• This Indicative Rate serves as a reference and for accounting purposes but is not mandatory for transactions.

3.2 Foreign Exchange Repatriation and Retention

• Exporters must repatriate foreign exchange earnings within three months of the export date.
• 50% of export proceeds must be immediately converted to Birr, while 50% can be kept in a Foreign Exchange Retention Account.
• Retention Account balances must be sold to the transacting bank within 30 days.

3.3 Imports and Exports

• Banks are mandated to provide import and export permits for goods of any value (except gold) against submission of required documents.
• Various modes of payment are allowed: Letter of Credit (L/C), Cash Against Documents (CAD), and advance payment.
• Importers have 120 days from the date of payment to provide evidence of goods entering the country.
• Special provisions exist for certain products (e.g., chat, livestock) and destinations (e.g., Sudan, Somalia).

3.4 Foreign Currency Accounts

Three main categories of Foreign Currency Accounts are authorized:

1. FCY Accounts for Foreign Entities (FDI Companies, International Organizations, Embassies, Foreign NGOs)
2. FCY Accounts for Resident and Non-Resident Ethiopians (including Non-Resident Foreign Nationals of Ethiopian Origin)
3. Retention Accounts for exporters of goods and services

Key points:

• Specific rules and limitations apply to each category.
• Non-exporting local companies are not explicitly listed as eligible for general foreign currency accounts.
• Ethiopian NGOs and not-for-profit organizations can open FCY accounts for specific inflows like grants and awards.

3.5 Capital Account Transactions

• Generally restricted unless explicitly exempted.
• Rules for capital repatriation, external loans, and foreign portfolio flows are provided.
• Foreign investors can repatriate profits, dividends, and proceeds from sales or liquidation.

3.6 Special Economic Zones (SEZs)

• Companies in SEZs can retain 100% of their foreign exchange earnings.
• They can effect foreign currency transfers abroad for any current or capital account transactions.
• Transactions within SEZs can be conducted in foreign currency.

3.7 Cash Limits and Customs Declarations

• Banks can hold up to 10% of their paid-up capital in foreign currency cash notes.
• Individuals entering/leaving Ethiopia face limits on cash holdings (e.g., 3,000 Birr for general travel, 10,000 Birr for travel to port cities).
• Customs declaration required for foreign currency exceeding USD 10,000 or equivalent.

3.8 Remittances and Payment Instruments

• Rules for international remittance services and the use of international payment cards are provided.
• Authorized banks can issue international debit/prepaid cards for travelers.
• Specific regulations for accepting international credit/debit cards by local merchants.

3.9 Forex Bureau Operations

• Both bank-affiliated and independent forex bureaus are allowed.
• Independent forex bureaus must meet specific capital and security deposit requirements.
• Forex bureaus are limited to buying and selling foreign exchange cash notes.

4. Implications for Different Entities

4.1 Exporters

• Can retain 50% of earnings in FCY for 30 days.
• Must repatriate earnings within 90 days of export.
• Can use retained FCY for various current account payments.

4.2 Importers

• More flexible import permit process.
• Must provide evidence of goods entering the country within 120 days of payment.
• Can negotiate exchange rates freely with banks.

4.3 Banks

• Play a central role in foreign exchange transactions.
• Can set their own exchange rates based on market conditions.
• Must report daily transaction rates to NBE.
• Need to comply with specific operational and reporting requirements.

4.4 Non-Exporting Companies

• Not explicitly allowed to maintain ongoing foreign currency accounts.
• May need to convert foreign currency receipts to Birr, though this isn't explicitly stated for all cases.
• Handling of foreign currency likely on a case-by-case basis.

4.5 Ethiopian NGOs

• Can open FCY accounts for specific inflows like grants and awards.
• Lack detailed guidelines on FCY account management.
• May face more restrictions compared to foreign NGOs.

5. Key Changes and Implications

• Move towards a more market-driven exchange rate system.
• Greater flexibility for exporters in managing foreign exchange earnings.
• Streamlined processes for imports and exports.
• Introduction of independent forex bureaus.
• More detailed regulations on remittances and international payment instruments.
• Special provisions for companies in Special Economic Zones.

6. Conclusion

The FXD/01/2024 directive represents a significant shift towards a more liberalized foreign exchange system in Ethiopia, while maintaining regulatory oversight. It provides greater flexibility in many areas but also introduces new responsibilities and reporting requirements. The success of these changes will depend on effective implementation and market adaptation to the new system.