Foreign Exchange

Foreign Exchange Directive No. FXD/01/2024 of Ethiopia

The Foreign Exchange Directive No. FXD/01/2024, issued by the National Bank of Ethiopia on July 29, 2024, represents a significant reform of the country’s foreign exchange regime.

Here are some key highlights of the directive:

Shift to a Market-Based Exchange Rate:

• The directive introduces a competitive, market-based determination of the exchange rate, allowing banks to buy and sell foreign currencies from/to their clients and among themselves at freely negotiated rates.
• The National Bank of Ethiopia (NBE) will make only limited interventions to support the market in its early days or if justified by disorderly market conditions.

Increased Foreign Exchange Retention for Exporters and Commercial Banks:

• Exporters and commercial banks are now allowed to retain a substantially increased portion of their foreign exchange earnings, which is expected to boost the supply of foreign exchange to the private sector.

Simplified Rules for Foreign Currency Accounts:

• The directive simplifies the rules for foreign currency accounts, especially those held by foreign institutions and foreign direct investors.

Removal of Interest Rate Ceilings:

• The NBE has removed interest rate ceilings that previously applied to private companies or banks when borrowing from abroad. This is expected to enhance access to foreign financing and reduce the cost of capital.

Opening of the Ethiopian Securities Market to Foreign Investors:

• The directive outlines plans to open the Ethiopian securities market to foreign investors under specified terms and conditions, which will facilitate capital inflows and attract foreign investment.

Reconciliation of Rules on Foreign Currency Carried by Travelers:

• The NBE has reconciled various rules on the amount of foreign currency that travelers may carry into or out of Ethiopia. This aims to streamline travel-related foreign exchange transactions.

Special Foreign Exchange Privileges for Special Economic Zones:

• Companies operating in special economic zones will enjoy special foreign exchange privileges, including the ability to retain 100 percent of their foreign exchange earnings.

Overall Impact:

The Foreign Exchange Directive No. FXD/01/2024 is expected to have a significant impact on the Ethiopian economy by:

• Promoting a more efficient allocation of foreign exchange resources.
• Enhancing the competitiveness of Ethiopian exports.
• Attracting greater foreign investment.
• Supporting the growth of the private sector.
• Reducing the reliance on foreign aid.

The implementation of this directive is a crucial step in Ethiopia’s economic reform program and is expected to contribute to the country’s sustainable and inclusive development.