Ethiopia Doubles Foreign Currency Retention Limit for Exporters
On August 11, 2023, the National Bank of Ethiopia (NBE) announced an amendment to Directive No. FXD/79/2022 governing the Retention and Utilization of Export Earnings and Inward Remittances (the “Amended Directive”). This amendment was effected via the Directive for Amendment of the Retention and Utilization of Export Earning and Inward Remittance Directive No. FXD/84/2023 (the “New Directive”). The New Directive effectively doubles the percentage of foreign currency that exporters are permitted to retain from their forex earnings. In the official announcement, the Governor of the National Bank highlighted that this move is geared toward alleviating Ethiopia's inflation rate, which had surged past 30% during the previous two years, before registering a slight decline to 28.8% in August 2023.
The announcement that came last month from the NBE permits exporters to retain 40% of their export proceeds in foreign currency, twice the amount allowed under the Amended Directive. However, the retention amount for inward remittances remains unchanged at 20%. The New Directive could encourage exports by introducing positive incentives.
Tracing the Evolution
The journey towards allowing exporters to retain their forex proceeds found its origins in August 1996, when NBE introduced Directive No. FXD/02/1996:
Directive No. FXD/02/1996:
Granted exporters the privilege of retaining a designated portion of their export proceeds in foreign currency.
First round of amendments in October 1996 focused on expanding the permissible amount of foreign currency (FCY) retention.
Allowed exporters to retain 100% of their export earnings.
Distributed it between accounts A and B in a 10:90 ratio.
Account A: exporters were allowed to retain 10% of the FCY for an unlimited period of time.
Account B: exporters retained 90% of the FCY for 28 days, after which it would automatically convert to the local currency.
Directive No. FXD/48/2017:
Adjusted the FCY retention ratios to a 30:70 distribution across the two accounts.
Account A: exporters were allowed to retain 30% of the FCY for an unlimited period of time.
Account B: exporters retained 70% of the FCY for 28 days, after which it would automatically convert to the local currency.
Policy adjustment in 2021:
Retained FCY amount for exporters increased to 45%.
Retention accounts A and B were combined into one account with no imposed time frame for conversion.
Directive No. FXD/79/2022:
Implemented due to an urgent need for currency stability.
Required businesses to surrender 80% of their forex earnings.
The surrendered amount was automatically converted into Ethiopian Birr.
This marked a more stringent turn in the policy evolution.
Possible Economic Implications
While assessing the impact of the most recent directive, it's essential to consider two potential outcomes. On the one hand, the directive introduces positive incentives to encourage exports. The Amended Directive, which required exporters from various industries, including meat processing, grain, coffee, sesame, and leather, to surrender up to 80% of their foreign currency earnings, has been a major concern. As a result, export earnings are on the decline, with coffee exports, for instance, dropping by nearly $80M USD since 2022. Furthermore, the leather industry, where the high cost of chemical inputs, driven by limited foreign currency access, has escalated production expenses, is also suffering. This has resulted in reduced production capacity, factory closures, and job losses, impacting not only individual producers but also the broader Ethiopian economy.
On the other hand, another consequence of the new directive could involve concerns about a reduction in the government's concentration of FCY, which could be mitigated through strategic measures. For instance, ensuring that exporters actively participate in the FCY market by legally providing FCY to importers and businesses would alleviate the burden on the National Bank. Attracting increased Foreign Direct Investment (FDI) through a robust legal framework and favorable business conditions can also counter any potential decrease in the government's foreign currency holdings. Lastly, ensuring government-owned enterprises like Ethiopian Airlines can contribute more effectively to foreign exchange reserves could be another way to reduce the impact.