Recently the National Bank of Ethiopia implemented major revision of the country’s foreign exchange system. The reform introduces a competitive, market-based determination of the exchange rate and addresses a long-standing distortion within the Ethiopian economy.
Costentinos Berhutesfa (PHD), an economist says Ethiopia’s foreign exchange reform is just one part of a wider package of economic reforms that are being implemented over the coming years. It has a power to stimulate various sectors including export, manufacturing and agriculture. In addition it enhances the National Bank currency reserve, shore up shortage of hard currency in private Banks, reduces illegal trade and attracts foreign investment.
In the past most financial resources were pumped to public investment and capital goods imported by the sector utilizes huge amount of money. Now the reform makes this disparity in the balance.As the result the flow of finance towards the private sector will enhance.
According to the Governor of National Bank of Ethiopia Mamo Mihretu, the package of reforms based on the country’s Home-Grown Economic Reform aiming at restoring macro-economic stability, boost private sector activity, and ensure sustainable, broad-based, and inclusive growth.
The foreign exchange regime introduces significant new policy changes including, shifting to a market-based exchange regime and in such a way banks are henceforth allowed to buy and sell foreign currencies from/to their clients and among themselves at freely negotiated rates, and with the NBE making only limited interventions to support the market in its early days and if justified by disrupted market conditions.
NBE allows foreign exchange to be retained by exporters and commercial banks and this measure paves the way to inclusive growth thus substantially boosting foreign currency supplies to the private sector. On the other hand, the removal of import restrictions that previously prohibited 38 product categories and the broader liberalization of the foreign exchange market for the imports of goods and services broaden the role of private sector in the economic growth.
The improvement of retention rules allowing exporters to retain 50 percent of their foreign exchange proceeds which was 40 percent previously.
The complete removal of rules governing banks’ allocation of foreign exchange that was based on a waiting list system for different categories of imports further relax the rule of the game.
According to Costentinos the introduction of non-bank foreign exchange bureaus that are free to engage in the buying and selling of foreign currency cash notes at market rates brings tremendous impact in changing the level playing field of the business in favor of the private sector. The removal of restrictions on Franco valuta imports can make the import of capital goods simplified.
The African Initiative President Kibour Genna who is economist by profession said that, the simplification of governing foreign currency accounts, especially those currently held by foreign institutions, companies, and the Diaspora accelerate the incoming of Foreign Direct Investment.
The allowance for residents to open foreign currency accounts, based on remittance inflows, transfers from abroad, forex-based salary or rental income, and for other specified cases, as well as the ability to use such foreign currency accounts for foreign service payments brings remedy for shortage of foreign currency.
On the other hand, the opening of Ethiopia’s securities market to foreign investors, with the terms and conditions to be specified further in the near future stimulate the economy. The ongoing granting of special foreign exchange privileges to companies within Special Economic Zones, including the ability to retain 100 percent of their foreign exchange earnings accelerates both export and import substitution.
The comprehensive set of measures that will support Ethiopia’s current stage of development and its increasing integration with the rest of the world helps the nation to penetrate global market. These reforms are consistent with longstanding Government intentions outlined in key policy documents, which recognized that Ethiopia should eventually move towards a market-based foreign exchange system as its economy grows in complexity and evolves over time.
The reform in the exchange rate system is challenging in several respects but at the same time critically necessary.
In the past, the system has given rise to large-scale contraband exports of Ethiopia’s precious resources and diverted the country’s foreign exchange earnings away from both the formal banking system and the domestic economy. All of this has improperly benefitted a few illegal actors and middlemen at the expense of Ethiopia’s productive sectors, which face chronic and acute foreign exchange shortages. Some of Ethiopia’s most dynamic businesses and entrepreneurs have thus suffered significantly as a result, undermining policy efforts to expand exports, boost manufacturing, attract further foreign investment, and establish a stronger foreign currency reserve position.
By shifting to a market-based determination of the exchange rate, a number of widespread economic benefits can and will be realized: The reform will benefit millions of Ethiopians in multiple foreign exchange-generating sectors. Key beneficiaries will include: millions of farmers involved in the production of exportable crops such as coffee, sesame, pulses, flowers, fruits, vegetables, and Khat.
Pastoralists and livestock owners exporting cattle and meat, tens of thousands of artisanal and formal miners engaged in mining activities, particularly of gold, hundreds of thousands of manufacturing sector employees in exportable sectors, thousands of business engaged in the services and tourism sectors especially those catering to international visitors, millions of individuals who regularly receive remittances from relatives living abroad and also hundreds of NGOs and private institutions who receive financing from external sources will benefit from the reform.
Beyond these, the business partners, suppliers, and dependents associated with all of the above entities also stand to benefit, further broadening the pool of reform beneficiaries. In addition, the reform will help ensure that Ethiopia’s foreign earnings potential is properly captured and repatriated for the benefit of its residents and productive sectors.
The reform also will provide a major boost to Ethiopia’s growing import-substituting industries, offering industries in this space an opportunity to scale up their operations and capture significant market share. Import substituting industries in the consumer and industrial sectors will be particularly important beneficiaries, in line with these, the “Ethiopia Tamrit” initiative currently being promoted for multiple local industries can be taken as the case in point. It also will complement numerous other reform measures taken in recent years to promote the private sector.
Moreover, such measures have comprised the opening up of sectors previously closed to private foreign investors including telecom, logistics, banking, capital markets, wholesale/retail trade, ease of doing business reforms, the start of private sector participation in public sector projects through Public Private Partnership initiative. The introduction of Special Economic Zone also can be taken as supportive tool in these regard.
The foreign exchange reform will improve Ethiopia’s attractiveness to foreign investors, thus providing a big boost to FDI inflows and aligning the country business environment with those of our neighbors and peers.
Ethiopia’s investment potential is strong on numerous dimension including a large population size, educated work force, widely available and competitively priced inputs such as labor and land, good air transport connectivity, improving logistics, and plentiful supplies of energy, natural resources, and mineral and all these advantages. Nevertheless, in the past these opportunities had not been fully exploited.
Putting in place a more conducive Foreign exchange regime removes what has been seen as a major deterrent by foreign investors and should deepen FDI interest and activity in Ethiopia. The reform will help address many long-standing business practices that hampered economic growth including informality and illegality in the economy.
In the past the use of parallel market exchange rates has taken root in several segments of the economy and many parts of the private business community as well as for remittance senders/beneficiaries, transactions took place.
After the introduction of the new exchange regime, the gap between the parallel market and that of the formal one is reduced and the number of customers who purchase hard currency from Banks instead of the parallel market is increasing from time to time. This clearly indicates that the reform measures have taken the nation to the right path for attaining sustainable development.
BY ABEBE WOLDEGIORGIS
THE ETHIOPIAN HERALD WEDNESDAY 1 JANUARY 2025
