Shift in Ethiopian Foreign Exchange Regime Likely to Offer Kenyan Exporters New Opportunities

The recent shift in Ethiopia’s foreign exchange regime to a competitive, market-based exchange rate system is likely to create new opportunities for Kenyan exporters. On July 29, 2024, the National Bank of Ethiopia (NBE) announced an immediate reform of the foreign exchange regime. This reform introduces a market-based determination of exchange rates, facilitates the repatriation of funds, and addresses long-standing distortions in Ethiopia's economy. The NBE’s directive will significantly impact the following key areas:

•  Shift to a Market-Based Exchange Regime:

Banks will now be permitted to buy and sell foreign currencies to their clients and among themselves at freely negotiated rates. The NBE will make limited interventions to support the market in its early days, stepping in only if market conditions become disorderly.

• End of Surrender Requirements and Improvement of Retention Rules:

Exporters of goods and services will now be allowed to convert their foreign currencies into Ethiopian Birr (ETB) at a freely negotiated rate. They are required to use 50% of their export proceeds in processing their foreign exchange transactions, while the remaining 50% can be retained in their Foreign Exchange Retention Account.

• Removal of Import Restrictions:

Authorized banks can now facilitate the import of goods of any value, provided the importer submits the necessary documents (including electronically) to the bank.

• Elimination of Rules on Foreign Exchange Allocation: 

The NBE has repealed previous directives that prioritized imports based on a waiting-list system. This opens more flexibility in accessing foreign exchange for imports.

• Introduction of Non-Bank Foreign Exchange Bureaus:

Foreign exchange bureaus may now operate as independent entities without bank affiliation or as specialized bank windows. Independent bureaus are restricted to buying and selling foreign exchange cash notes and are not allowed to engage in other banking activities.

• Removal of Restrictions on Franco-Valuta Imports:

Imports of goods that do not utilize foreign exchange from the banking system—commonly known as "franco-valuta imports"—will now be permitted. These imports, which do not require Letters of Credit or other payment methods, will still be subject to customs, tax, health, and other relevant regulatory standards.

• Rules Governing Foreign Currency Accounts:

Eligible individuals and entities may open foreign currency (FCY) accounts by meeting specific requirements. Three categories of FCY accounts are authorized by the NBE, with more types potentially added in the future:

- FCY accounts for foreign entities (FDI companies, international organizations, embassies, foreign NGOs).

- FCY accounts for resident and nonresident Ethiopians, including nonresident foreign nationals of Ethiopian origin.

- Retention accounts for exporters of goods and services.

The shift to a market-based foreign exchange regime marks a critical moment in Ethiopia’s economic policy and presents promising opportunities for Kenyan exporters. With Ethiopia’s population exceeding 100 million, this reform could ease many of the challenges Kenyan exporters have faced, enhancing Kenya’s presence in the Ethiopian market. Additionally, this move is expected to foster stronger bilateral trade engagements and leverage existing trade platforms established by both governments. Challenges such as inflation, surrender rules, and exchange rate volatility, which have historically hindered trade, will now be more effectively managed through the foreign exchange reform.