NBE Issues Directive on Ethiopia’s FX Regime

Ethiopia has maintained a strict foreign exchange regime for over three decades, with the NBE setting exchange rates and regulating foreign currency transactions and payments. The country has been grappling with persistent shortages of foreign currency. Countries like Ethiopia, which heavily depend on imports encounter difficulties in acquiring essential goods due to the scarcity of foreign currency leading to higher domestic prices for goods and services and contributing to inflation.

Meeting foreign debt payments also become challenging, potentially resulting in a debt crisis and negatively impacting the country’s credit rating. This dismal economic situation normally deter foreign investors from investing in a country where currency shortages pose a risk to the realization of their returns. Companies relying on imported raw materials or machinery experience operational disruptions, reduced production, and increased costs. Acutely aware of this, policy initiatives have recently been introduced by the NBE to progressively relax controls on foreign exchange and enhance its availability for the private sector, aiming to rectify existing imbalances.

A series of gradual liberalisation measures have been put into effect. However, despite these efforts, the acute shortage of currency persisted, leading to severe foreign currency shortages, hyperinflation, and a significant decline in living standards. In July 2024, the Government has made a huge leap of faith by introducing a ground breaking shift in economic policy by unveiling a comprehensive reform of the foreign exchange regulatory regime, marked by the liberalization of its foreign exchange market. The NBE enacted the Foreign Exchange Directive to implement this policy reform.

The Foreign Exchange Directive aims to establish a well-functioning foreign exchange market with clearly specified rules, roles, and responsibilities, that are critical for promoting trade, financial stability, and economic growth. As an objective, the Directive seeks to create a more open and competitive market, with the expectation of attracting substantial foreign exchange inflows, ensuring efficient resource allocation, and fostering greater transparency in foreign exchange transactions. Additionally, the Directive has consolidated various preceding directives on foreign exchange into one comprehensive framework.

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Should you have any questions regarding the information in this legal alert, please do not hesitate to contact, Mesfin Tafesse or Haymanot Belay.