RETENTION ACCOUNTS FOR EXPORTERS: HOW THE 50% RULE WORKS

The recent amendment to the foreign exchange retention policy for exporters FOREIGN EXCHANGE DIRECTIVE NO. FXD/01/2024 has introduced significant changes that offer both opportunities and challenges for businesses in Ethiopia. Under the new directive, exporters are now allowed to retain 50% of their foreign exchange proceeds—an increase from the previous 40%. While this change provides exporters with greater flexibility in managing their funds, it also introduces stricter timelines for utilizing or converting those funds.

Let me share a story about one of our clients who learned this lesson the hard way. A seasoned exporter, let’s call him "Ato Girma," recently completed a large shipment and the 50% foreign exchange proceeds deposited into his retention account. Confident that he could wait for better market conditions, Girma planned to sell his retained foreign currency at a higher exchange rate when the market improved.

However, life got busy, and Girma neglected to closely monitor his retention account. After 30 days had passed, he returned to the bank, assuming that his foreign currency was still available for negotiation. To his shock, the bank had automatically converted his retained foreign exchange into Birr at the standard exchange rate on the last day of the month—without any notification.

The rate at which his foreign currency was converted was significantly lower than what he could have negotiated on the open market just a few days earlier. Girma ended up losing millions of Birr as a result, simply because he didn’t act within the 30-day timeframe. This unfortunate incident affected his bottom line.

Let’s walk through how the 50% rule works and why it is critical for exporters to manage their retention accounts efficiently to avoid missed opportunities and financial losses.

THE 50% RETENTION RULE: A NEW OPPORTUNITY FOR EXPORTERS

The updated directive from the National Bank of Ethiopia (NBE) allows exporters to retain 50% of their foreign exchange earnings in retention accounts. This means that when an exporter completes a transaction and brings foreign currency into the country, they can keep half of the earnings in foreign currency form. The remaining 50% must be converted into Ethiopian Birr at the prevailing exchange rate.

The key purpose of this rule is to give exporters more control over their foreign exchange, allowing them to use it for their own operational needs, such as importing goods, paying external debts, or making international service payments. This flexibility helps exporters better manage cash flow, especially in an environment where access to foreign exchange can be limited.

However, with this increased flexibility comes the responsibility to manage these accounts effectively, particularly given the 30-day window stipulated by the directive. Any foreign exchange held in a retention account must be utilized or sold to the bank within 30 days. Failure to do so results in an automatic conversion to Ethiopian Birr at the bank's discretion, potentially causing exporters to lose out on better exchange rates or advantageous market conditions.

RETENTION ACCOUNTS FOR EXPORTS: HOW THEY WORK

1. Opening Foreign Exchange Retention Accounts

Exporters of goods and services in Ethiopia are entitled to open a foreign exchange retention account, which allows them to manage their foreign currency earnings more effectively. Commercial banks are permitted to open and manage these accounts on behalf of eligible exporters. The purpose of this account is to help businesses retain a portion of their foreign currency earnings, giving them more flexibility to reinvest in their operations, cover external expenses, or pay for imported goods and services.

2. Retention Rights for Exporters

Once a foreign exchange retention account has been opened, exporters gain specific rights regarding how much foreign currency they can retain and how they can use it. Here’s how it works:

i. Retention Rights as Specified by the Directive

Exporters have the right to retain a portion of their foreign exchange proceeds as outlined in Article 6 of the NBE's Foreign Exchange Directive. Under the current rule, exporters are allowed to retain 50% of their earnings from international transactions in their retention account. This gives exporters the ability to hold onto foreign currency for their business needs instead of being forced to convert the entire amount into Ethiopian Birr immediately.

ii. Authorization to Credit Retention Accounts

A bank can only credit the retention account after receiving written authorization from the recipient (exporter or beneficiary). This process ensures that the exporter retains control over how and when their foreign currency earnings are credited into the retention account, adding an extra layer of security and transparency.

iii. Credit for Licensed Merchants and Entities

In addition to exporters, certain merchants and entities licensed by the NBE to handle foreign currency transactions, such as those accepting payments via cash notes, credit cards, debit cards, or prepaid cards, can also have funds credited to their retention accounts. This ensures that businesses involved in foreign trade, tourism, and other sectors with foreign clients can also retain and manage their foreign currency earnings more effectively.

3. Utilizing Foreign Exchange Retention Accounts

The retention account is not just a place to store foreign currency; it is an essential tool for exporters to manage their foreign currency resources. The use of funds from the retention account is governed by specific regulations laid out in Article 6 of the directive. Here’s how it works:

i. Flexible Utilization for Business Needs

Exporters can use the funds in their retention accounts for a variety of business purposes, including paying for imports of goods, covering service-related expenses, repaying external debts, or distributing dividends to shareholders. This flexibility allows businesses to use their foreign currency where it matters most, without the need to convert it into local currency immediately, which might lead to unfavorable exchange rates.

ii. Own-Use Clause

The foreign exchange retained in these accounts can only be utilized by the same legal entity that earned it. This means that the forex cannot be transferred to other entities or used for purposes unrelated to the business that generated the earnings. This ensures that foreign currency is used strictly for operational and strategic needs, such as procurement, debt servicing, or reinvestment in the company.

iii. 30-Day Time Limit for Conversion

Exporters are required to either utilize or sell the retained foreign exchange within a 30-day period. After this timeframe, any unutilized foreign currency will be automatically converted into Ethiopian Birr at the prevailing exchange rate. However, exporters can choose to sell their retained foreign exchange at any point within this 30-day period if they feel the market conditions are favorable, allowing them to capitalize on better exchange rates.

4. Strategic Benefits of Retention Accounts

Foreign exchange retention accounts provide Ethiopian exporters with a strategic advantage in managing their international transactions. The ability to retain foreign currency earnings offers businesses greater financial autonomy, reducing their dependency on external sources for foreign exchange. Additionally, retention accounts can play a crucial role in managing currency risks, allowing exporters to time their foreign currency conversions based on favorable market conditions.

Furthermore, by giving businesses the ability to hold foreign currency for their own use, retention accounts contribute to the overall stability of an exporter's financial operations, helping them navigate fluctuations in exchange rates and meet their international obligations with greater ease.

In conclusion, managing retention accounts effectively under the new 50% retention rule is crucial for exporters to maximize their foreign exchange earnings and avoid unnecessary financial losses. Exporters should regularly monitor their retention accounts, set reminders, and consider selling their foreign exchange before the 30-day deadline to retain control over the transaction.

The 50% retention rule offers a golden opportunity to retain more foreign exchange and manage financial operations more flexibly. However, as Girma’s story illustrates, it’s crucial for exporters to understand the rules and act within the 30-day window. By taking proactive steps to manage your retention accounts effectively, you can avoid costly mistakes and maximize the value of your forex earnings.

Alternatively, using retained forex for business expenses, such as imports or debt repayments, can help minimize currency conversion losses. Maintaining close communication with your bank for advice on market trends and leveraging digital banking tools for tracking and alerts are also smart strategies to streamline retention account management. By adopting these practices, exporters can optimize the benefits of the 50% retention rule and better navigate the complexities of foreign exchange management.