Ethiopia Unshackles the Birr from Decades of Control

The National Bank of Ethiopia (NBE) is set to revolutionise the country's foreign exchange market with a new directive that grants banks and authorised foreign exchange dealers the autonomy to set their own rates. This historic move, effective Tuesday, July 30, 2024, marks a major departure from the previously rigid determinations that characterised Ethiopia's forex market for the past 50 years.

The NBE is set to issue a comprehensive foreign exchange directive (FXD/01/2024) on Monday, which seeks to enhance efficiency and promote competition in the foreign exchange market. Ethiopian authorities are upbeat about their daring move, predicting that the liberalisation of the forex market will attract substantial foreign exchange inflows from development partners. They hope this, in turn, paves the way for efficient resource allocation and greater transparency in foreign exchange transactions.

The Central Bank Governora, Mamo Mehiretu, met with senior bank executives on Sunday night, outlining a code of conduct for the new market operation. He also disclosed a revised foreign exchange retention and repatriation practices mandating exporters of goods and services to repatriate their foreign exchange gains. They are required to convert 50pc of these profits into Birr at market rates and can maintain the remaining 50pc in foreign exchange retention accounts for future use. This dual strategy seeks to enhance foreign currency reserves while also offering more autonomy to exporters in managing their foreign exchange income.

A crucial provision in the directive is that idle foreign exchange earnings must be sold to the transacting bank within a 30-day period. The regulation focuses on the interbank foreign exchange market and is expected to promote liquidity.

The directive also widens the pool of participants in the foreign exchange market, introducing non-bank entities like independent foreign exchange bureaus to selected segments. The expanded diversity is expected to stimulate competition, improve service delivery, and widen access to foreign exchange services.

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