ETHIOPIA Trends and Developments Contributed by: Getu Shiferaw, Awoke Mitku, Gutema Kajela Ejeta and Debora Belachew, Mehrteab & Getu Advocates LLP
The Foreign Exchange Directive and Green Directive Until July 2024, Ethiopia had been following stringent and restrictive foreign exchange regu - lations. The foreign exchange rate had been reg - ulated by the NBE. However, the Ethiopian gov - ernment has recently issued policies and laws that have transitioned the country to a market- based foreign exchange rate system, allowing the value of the birr (the Ethiopian currency) to be determined by the market. This significant shift was accomplished by enacting the NBE’s Foreign Exchange Directive No FXD/01/2024. This policy and legal reform introduces more flexible regulations for the repatriation of funds from Ethiopia, allowing for greater convertibil - ity of the birr. This move is intended to facilitate international trade and investment. The justifications for revising and consolidating the various directives related to the regulation and operation of Ethiopia’s foreign exchange markets, as stated in the preamble of the Green Directive, are: • to ensure there is a well-functioning foreign exchange market with clearly specified rules, roles and responsibilities to promote trade, financial stability and economic growth; and • to provide a more open and competitive foreign exchange market in order to attract substantial foreign exchange inflows, ensure efficient resource allocation and foster greater transparency in foreign exchange transaction activity. The foreign exchange reforms announced on 29 July 2024 involve significant policy changes, as follows. • Transition from currency pegging to floating: There has been a shift to a market-based
exchange regime, where banks are hence - forth allowed to buy and sell foreign curren - cies from/to their clients, and among them - selves, at freely negotiated rates, and with the NBE making only limited interventions to support the market in its early days and if justified by disorderly market conditions. • Abolition of the surrender requirement: Previ - ously, exporters of goods and services were required to surrender 50% of their export proceeds to the NBE, and 10% to commer - cial banks, thus retaining 40%. The Green Directive simplifies this – exporters now surrender only 50% of their export proceeds to the bank, at a freely negotiated rate, while keeping the remaining 50% in their foreign exchange retention account. • Abolition of the rules on the allocation of foreign currency: The elimination of the prior - ity list system for foreign currency allocation, which previously categorised essential goods for preferential treatment, is a major policy change. Instead, the Green Directive empha - sises the availability of foreign exchange on demand, simplifying the process for import - ers and ensuring a more transparent and equitable mechanism for accessing foreign currency. • Introduction of independent forex bureaus: As one of the natural consequences of imple - menting market-led and floating rate foreign exchange systems, the Green Directive intro - duced authorised foreign exchange dealers, also called independent forex bureaus, for the first time in the history of modern Ethiopia. • Lifting of restrictions on the import of certain items: The Green Directive lifted the restric - tions on importing 38 categories of products that were imposed by the NBE in October 2022, thereby granting greater access to foreign exchange for goods and services imports. However, inconsistency between
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