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National Bank of Ethiopia (NBE) Directive Amendments on Foreign Exchange (2016/2017)

The National Bank of Ethiopia (NBE) is the central agency with the mandate of regulating the financial sector and, among others, foreign exchange. The NBE formulates and implements exchange rate policies. As part of this mandate, the NBE issues regular directives and circulars with the aim of regulating the foreign exchange regime. This legal update will provide you with a short summary of the relevant directives of the NBE that amended existing directives in connection with foreign exchange regulation in Ethiopia from the period August 2016 – December 2017.

Transparency in Foreign Currency Allocation and Foreign Exchange Management Directive No. FXD/46/2016 Amendment

The NBE amended the Transparency in Foreign Currency Allocation and Foreign Exchange Management FXD/45/2016 (Transparency Directive) by Directive No. FXD/46/2016. (Transparency Directive Amendment). The Transparency Directives provide the priority areas where foreign currency is allocated for import purposes based on the country’s social and economic needs. This directive determines the accessibility of foreign exchange on the basis of the priority list areas provided.

Among the priority areas under the Transparency Directive were essential goods which includes fuel, fertilizer and other agricultural inputs, pharmaceutical products, factories’ requests for procurement of machineries, equipment, spare parts, raw materials and accessories and import of nutritious food for babies. The Transparency Directive Amendment expanded this list to include, motor oil, lubricants and LGP gas. Agricultural inputs and raw materials were also expounded to include seeds and pesticides, irrigation pumps, animal feeds, tractors, harvesting machineries and their spare parts and animal hybrids. Moreover, pharmaceutical products are elaborated to include medicine, laboratory equipment and reagents, medical equipment and appliances.

The Transparency Amendment Directive further expanded import of chemicals and sales from shares and liquidation of companies by foreign direct investment to the priority list. In addition, import of construction materials for construction companies that doesn’t exceed 50,000 USD and import of educational materials were added to the priority list.

The Transparency Directive Amendment further provides that four categories of requests for foreign currency are exempted from registration procedure and shall be served on demand.

  1. On-demand service for an account holder of either a non-resident foreign currency and non-resident transferable birr account, foreign currency account of nonresident Ethiopian and Nonresident Ethiopian origin or retention accounts.
  2. Invisible payments. Invisible payments include payments for installation, commissioning, consultancy, erecting and royalty fee, cargo handling, freight and other associated costs.
  3. Salary transfer of foreign employees.
  4. External debt payment and supplier’s credits.

The Transparency Directive prohibited the allocation of foreign exchange without due procedure. Commericial banks are prohibited from approving L/C application without collecting minimum of 30% of the L/C value in cash up front. The directive also prohibited releasing the CAD documents to their customers without effecting payments to suppliers based on the modality of payments as per the international practice. These provisions are maintained under the Transparency Directive Amendment. However, an exception is added on the rules regarding CAD and L/C above for manufacturing sector.

In addition to the above, the Transparency Directive Amendment prohibits banks from issuing permit for goods shipped before approval, after the expiry of L/C and purchase order. Processing import application for approved foreign currency exceeding the period of 15 consecutive days from the date of approval is prohibited. Moreover, banks are prohibited from accepting request on change of items and suppliers after registration of proforma invoice. The prohibition on importers from filling import on the same item in different banks and the penalty thereof are kept intact under the amendment directive in the same manner as the Transparency Directive.

External Loan and Supplier’s Credit Directive No. REL/05/2002 Amendment

The external Loan and Supplier’s Credit Directive No. REL/05/2002 was amended by directive No. FXD/47/2017. (Amendment). This amendment directive provides the procedures of external loan and supplier’s credit agreement approval. All foreign loans must be registered by the NBE. Failure to register foreign loan entails prohibition of repayment in convertible currency. All entities seeking to obtain foreign loans must submit the draft loan agreement for review by the NBE. The draft loan agreement is expected to include the interest rate, applicable charges, borrower lender-relationship, loan disbursement schedule, repayment schedule and purpose of loan. The directive also provides the all-in cost ceiling for external loan and the debt to equity ratio for foreign capital. Upon approval of the loan agreement by the NBE, the applicant is granted a foreign loan registration certificate. Without such certification, any subsequent request for debt repayment in foreign exchange will not be approved by the NBE.

Retention and Utilization of Export Earnings and Inward Remittances Directive No. FXD/11/1998 Amendment

A directive to amend the Retention and Utilization of Export Earnings and Inward Remittances Directive No. FXD/11/1998 was issued by the NBE. Regular recipients of foreign exchange remittance from abroad and exports of goods and services are eligible customers to open retention accounts at commercial banks. There are two types of retention accounts that can be opened for eligible customers. Foreign Exchange Retention Account A and Foreign Exchange Retention Account B. The major change introduced by this amendment is in regards to the percentage of foreign exchange earnings that can be retained in foreign currency by an eligible customer. The previous directive provided that eligible customers can retain only 10% of their foreign exchange earnings for an indefinite period of time under account A and 90% of their foreign exchange earnings for 28 days under account B. This amendment has increased the percentage of foreign exchange earnings that can be retained indefinitely to 30% under account A and the remaining 70% under account B will be converted to local currency if not utilized within 28 days. Therefore, eligible customers can only use the money to finance direct business related and current payments such as importation of goods, payment for promotion, subscription fee, settlement of external loan and the like.

Limits on the Birr and Foreign Currency Holding in the Territory of Ethiopia Directive No. FXD/49/2017

The National Bank of Ethiopia Establishment Proclamation 591/2000 (as amended) under article 20 (2) provides that “the conditions, limitations and circumstances under which residents of Ethiopia, and non-residents visiting Ethiopia, or any other person may possess and utilize foreign currency or instruments of payments in foreign exchange shall be determined by directive to be issued by the National Bank.” Pursuant to this mandate, NBE issued “Limits on Birr and Foreign Currency Holding Directive No. FXD/49/2017 (“Directive”) in October 2017 replacing the 2007 NBE Directive FXD34/2007. The Directive aims to limit the amount of birr and dollars that can be held by travelers coming in and out of Ethiopia. The key restrictions under this directives are:

  1. A person travelling in and out of Ethiopia shall hold a maximum of 1,000 Birr per travel. An exception is provided to a traveler to Djibouti that can hold up a maximum of Birr 4,000 Birr.
  2. No person residing in Ethiopia is allowed to hold foreign currency for more than 30 days.
  3. Any resident entering Ethiopia from abroad shall declare its possession if it holds more than 1000 USD. The minimum USD rises to 3,000 if such person is non-resident.
  4. Any resident carrying foreign currency shall convert the currency in an authorized bank. Non-residents can possess the foreign exchange until the validity date of their visa.

Any traveler that fails to comply with the above rules will be subject to the criminal liabilities and penalties under the NBE Proclamation, Customs Proclamation and Criminal Code. Under article 26 (4) of the NBE proclamation, “whosoever in violation of the proclamation, regulations or directives of the National Bank leaves or attempts to leave the country, or enters or attempts to enter Ethiopian territory carrying Ethiopian currency in excess of the amount provided by the National Bank shall without prejudice to the confiscation of the property with which the offense is committed be punishable in accordance with the Criminal Code. Furthermore, violation of Article 168 of the Customs Proclamation, which provides that “any person who, knowingly, or ought to have been aware of the fact, imports, exports, or attempts to export prohibited or restricted goods or goods subject to customs clearance by smuggling out of their legal route or illegally imports duly exported goods, in contravention of customs law, shall be punishable with rigorous imprisonment not less than five years and not exceeding ten years and with fine not less than Birr 50,000 and not exceeding Birr 200,000.

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