RENEW Strategies

It Just Got A Lot Better for Investors in Ethiopia…If You Export

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Tsegamlak Solomon
| November 10, 2020


In an effort to incentivize exports from Ethiopia and replenish the desperately low hard currency reserves that have held back the country’s growth for years, the National Bank of Ethiopia (NBE) has issued a directive allowing exporters and recipients of inward remittance to open a foreign exchange retention account at the bank of their preference. But not every foreign exchange remittance entitles a company or individual to open a remittance account. The directive is focused on: resident companies, institutions, individuals and government organizations, other than a diplomatic mission, who receive foreign exchange regularly from abroad. This is good news for a lot of exporters. Here’s how it works:

There are two types of foreign exchange retention accounts, i.e. “Foreign Exchange Retention Account A” and “Foreign Exchange Retention Account B”. These accounts will be credited from the export of goods and services and incoming transfer made for inward remittance. Of the total foreign exchange earnings, 30% of the account balance will be deposited in Retention Account A for an indefinite period of time and 70% of the account balance will be credited to Retention Account B for up to 28 days. At the end of the 28 days, the balance will automatically be converted into the local currency, Ethiopian Birr (ETB). The funds in Account A and B can only be used to finance direct business-related and current payments, the details of which are listed in the directive.

Before this directive, this was not the case. Most exporters used their influence at banks to finance their other import businesses. This, through time, distorted the export sector and created something called commodity dumping. Here, exporters buy up anything they can export (sesame, mung beans, coffee) and sell it on the international market for below-average prices and quality, simply to get access to their forex. Next, they use their influence at the banks to open up letters of credit to purchase items like flat-screen TVs, mobile phones, computers, etc., which is where they generate their real profits. The imports handsomely compensate for any losses they realized on their exports. This ultimately came to the detriment of the country’s reputation in the international markets. Because exporters only cared about the forex they generated, their quality and reputation for the products they sold were second to closing the deal. The millions of farmers that were at the start of that value chain also suffered, as they did not always get the best prices and also had the long-term impact of bad branding which hurt their future development and growth. Also, the forex generated wasn’t regularly used for tractors and machines, new seeds and fertilizer that could improve the commodities which these exporters sold. Rather, it was used to import luxury goods that most Ethiopians never get to buy.[1}

The new NBE Directive No. FXD/66/2020, which repealed Directive No. FXD/48/2017, seems to balance the strict regulations of the past with practical current realities and falls somewhere in between. According to the new directive, exporters who have a balance in Retention Account A, in addition to financing their export business, can also use their foreign exchange to import pharmaceuticals and pharmaceutical products, agricultural inputs and pieces of machinery amongst other items. The details surrounding these imports are exhaustively listed in the new directive. These items are given priority in the allocation of foreign exchange by the government. Hence, if properly implemented, the government will be able to incentivize proper exporters, while simultaneously managing the foreign exchange needs of those sectors, which are not being directly financed by export retained earnings but are actually necessities.

The manner of utilizing the foreign exchange in Retention Account B remains unchanged. This account can only be used to finance direct business-related and current payments like the import of goods and related services. In addition, it can be used to settle external loans and supplier’s credit, and to settle service payments.

Another unchanged item from the previous directive is that companies with retained earnings can freely negotiate with their banks and sell their foreign exchange at a price that is not exceeding the selling exchange rate prevalent on the date. Currently, as a rule, the NBE sets the daily buying rate of foreign exchange for banks (i.e., the price at which banks are allowed to buy foreign exchange). However, banks do have the liberty to decide the selling exchange rate but cannot exceed a 2% margin from the buying rate set by the NBE. The retention directive puts an exception to this rule and allows banks to freely negotiate with exporters who have foreign exchange in their retention account. It allows banks to buy the exporters’ foreign exchange at a favorable price rather than using the daily buying rate set by the NBE. They will still need to remain within the 2% margin since that is the selling rate cap. This incentivizes exporters who have more than enough foreign exchange in their accounts to meet their import needs.

The new directive seems to have two overarching purposes. The first one, as discussed above, is to incentivize exporters by allowing for favorable use to meet their import needs and to also get higher exchange rates if they decide to convert their foreign exchange to Birr. Secondly, this helps in channeling the foreign exchange earned from exports to priority areas. Even though the repealed directive had a similar arrangement with even stricter regulations, it was not effective when it came to enforcement. The new directive, if supported with proper enforcement mechanisms, will provide a certain degree of flexibility and channeling of foreign exchange into key import areas such as materials required for export packing and labeling; service payments; settlement of external loans; import of agricultural inputs and pieces of machinery; manufacturing inputs; and machinery and equipment.

Overall, this is a good step in the right direction for Ethiopia and for those looking to invest here. Any efforts to increase the country’s foreign currency reserves are welcomed advances. We hope, and may see, further reforms on the horizon.

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1. According to the Minister of the Ministry of Trade and Industry in an interview with Ezega available at: https://www.ezega.com/News/NewsDetails/7345/Ethiopia-Introduces-New-Directive-to-Halt-Fraud-in-Export-Business