As a follow-up to the government’s recent announcement of Ethiopia’s economic reform agenda, the National Bank of Ethiopia has announced a significant overhaul of the foreign exchange (FX) system, effective immediately. This reform addresses a long-standing distortion in the Ethiopian economy by introducing a competitive, market-based method of determining the exchange rate. The new Foreign Exchange Directive (FXD/01/2024), issued on July 29, will serve as the implementation guide for the reform.
The reform package, which is based on the nation’s Home-Grown Economic Reform Plan (HGER 2.0), intends to guarantee sustainable, inclusive, and broad-based growth as well as to restore macroeconomic stability and stimulate private sector activity.
The reforms are a comprehensive package of policies intended to promote Ethiopia’s existing development trajectory and growing global integration. These changes align with the government’s long-standing aspirations, as stated in important policy documents, which acknowledged that as Ethiopia’s economy develops and becomes more complicated over time, it should eventually transition to a market-based foreign exchange system. The following areas will see substantial new policy changes as a result of this foreign exchange directive
- The end of surrender requirements to the NBE: permitting exporters and commercial banks to hold onto foreign exchange, significantly increasing the amount of FX supplied to the private sector.
- A shift to a market-based exchange regime: wherein banks will now be able to buy and sell foreign currencies at freely negotiated rates, both to and from their clients and among themselves. The NBE will only make limited interventions to support the market in its early stages and if necessary due to disruptive market conditions.
- The improvement of retention rules: enabling exporters to keep 50% of their foreign exchange earnings instead of 40% as was previously the case.
- The removal of import restrictions that previously prohibited 38 product categories: the broader liberalization of the foreign exchange market for the imports of goods and services, while capital account outflows remain restricted as before.
- The introduction of non-bank foreign exchange bureaus: which are hereby authorized to purchase and sell foreign currency cash notes at market prices.
- The allowance for residents to open foreign currency accounts: predicated on the capacity to use such foreign currency accounts for payments for foreign services, as well as remittance inflows, transfers from overseas, FX-based salary or rental income, and other specific instances.
- The opening of Ethiopia’s securities market to foreign investors, with the terms and conditions to be specified further in the near future.
- Freedom on the amount of cash for travelers: The relaxation of various rules on the amount of foreign currency cash notes travelers may carry when travelling into or out of Ethiopia.
The FX reforms that have been outlined above constitute a complete package of policies that would facilitate Ethiopia’s continued development and growing involvement with the global community. These changes align with long-standing government goals stated in important policy documents, which acknowledged that as Ethiopia’s economy develops and becomes more complicated over time, it should eventually transition to a market-based foreign exchange system.