Radar | Jan 25,2020
The Ministry of Finance has lifted the 250,000-dollar cap on franco valuta imports, allowing for the import of all goods except fossil fuel-powered automobiles and security and defence equipment. The change was outlined in a circular signed by State Minister Eyob Tekalign (PhD), who described it as part of the government's broader economic reform program.
“Previous measures were implemented under a distorted market to solve specific problems,” Eyob said.
According to Eyob, the revised policy aspires to build streamlined trade and signal a shift in the economic system rather than create an alternative trading model.
"Over time, it'll become irrelevant," he told Fortune.
The decision allows goods to be imported without the requirement for foreign exchange payments, bypassing stringent banking procedures. Before this policy shift, importers were required to use instruments such as Letters of Credit (LC) or Cash Against Documents (CAD) to facilitate imports. These financial mechanisms imposed strict payment protocols regulated by the National Bank of Ethiopia (NBE).
However, Eyob clarified that this system is only temporary. He expects it will gradually become irrelevant as the market formalises and previous distortions are resolved, dismissing concerns about a rise in the parallel market rate.
"The regime is now market-driven," he said.
Franco Valuta is a policy approach that allows importers to access foreign currency from unofficial or unregulated sources to finance their imports, rather than relying solely on the official foreign exchange market. It is usually introduced in an attempt to address persistent foreign currency shortages and facilitate access to essential imports.
Officials believe that it can alleviate pressure on the official exchange rate, potentially narrowing the gap between the official and parallel market rates and reducing the incentive for illicit black-market transactions.
Eyob noted that local manufacturers now have to deal with only the Customs Commission while importing raw materials and spare parts, with reduced bureaucratic hurdles.
"The main goal is to support the manufacturing sector," he told Fortune.
Consumer goods importers are also set to benefit, potentially creating a deflationary effect for end consumers. Eyob noted the dual benefits of promoting local production and ensuring affordable prices.
"It allows us to produce locally when possible and buy at competitive prices when we can't," he said.
Economists such as Atlaw Alemu (PhD) concur. An economist at Addis Abeba University believes that manufacturers, who previously faced contract cancellations due to delayed payments, are the main beneficiaries. He noted that banks have been prioritising essential imports like medical equipment, petroleum, and agricultural inputs, leaving most importers sidelined and on waiting lists.
"They will be active now," he said.
He foresees that this change could also shift the contraband market towards legality, as the restriction has markedly narrowed down.
The liberalisation of foreign exchange market serves as a springboard for the move, which in turn simplified import processes. Minister Kassahun Gofe (PhD) of the Ministry of Trade & Regional Integration, recalls that franco valuta was allowed for a list of items that are prioritised for foreign currency allocation from commercial banks.
"It was restricted not to exacerbate the market distortion," he told Fortune.
Along with the reform, Kassahun believes the new rule will stabilise the market along with the formal route.
Importers are scrambling to initiate imports with easier access.
Wubshet Delelegn, general manager of Menesh Agricultural & Construction Machineries Manufacturing & Wholesale, shared that his company has struggled to obtain forex for a while. As a small enterprise, Wubshet often needs spare parts for machinery and production equipment. As he seeks access to forex, his concerns now shifted to the potential influx of counterfeit products, which could undermine legitimate imports.
Another manufacturer Mastewal Tadios, head of the quality & control assurance team at Adama Agricultural Industry, stated that although raw materials for agriculture production were excise tax-free, they were unable to import for the past seven years, relying instead on third-party importers.
"It'll now be easier to import," she said.
While acknowledging the scheme may provide a short-term solution to address Ethiopia's foreign currency shortages, bank experts like Tesfaye Boru (PhD), president of Global Ethiopia Bank, suggest a focus on increased foreign currency supply and a comprehensive set of complementary reforms. Tesfaye believes it is more endurable for exchange rate stability and facilitating the importation of essential goods.
"It offers a sustainable path," he told Fortune.
PUBLISHED ON
Aug 25,2024 [ VOL
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