Foreign earnings restrictions in Ethiopia to be eased, but doubts remain on compliance of regulation to the AfCFTA Protocol on Investment

In force since 6 January 2022, a Directive issued from the National Bank of Ethiopia (NBE) requires all exporters of goods and services in the country to transfer 70 percent of their foreign currency earnings to the NBE and 10 percent to their respective commercial banks. The measure, aimed at countering the perennial shortage of foreign currency in the country, allows exporters to access to only 20 percent of the earnings generated by their sales abroad, with the rest being transferred to the banking system that will convert the relevant amount in local currency. Today, the NBE has announced the adoption of a new Directive that relaxes this requirement, allowing local exporters to retain up to 40 percent of their foreign exchange proceeds. This measure is supposed to relaunch exports, allowing Ethiopian traders to use a higher share of their foreign earnings for buying the inputs they need from outside the country in order to feed their manufacturing processes or to pay the services they need from abroad.

More specifically, 50 percent of such forex earnings will be surrendered to the Central Bank and 10 percent to the exporters' commercial banks, that will receive the equivalent of these sums in birr. It is not the first time that the NBE introduces this 40/60 percent retention share rule. Already in 2021 such scheme was operational.

The ability of the new measure to reach the objective of relaunching exports in Ethiopia is doubtful. At the beginning of July 2023 some private sector organizations such as the Ethiopian Leather Industries Association requested the right to dispose of at least 50% of their export earnings. In its request, the Association highlighted that even this share was not enough for the sector, considering the need to import chemicals from outside the country for the manufacture of their products that are not available locally, and the high cost of such materials.

In a country where most of inputs used in manufacturing comes from abroad (due to their unavailability internally), the above restriction risks to further reduce the production levels of the country. Moreover, it acts as a major barrier for Ethiopian traders to invest in other countries in the region or in Africa, casting doubts on the compatibility of such a measure with the recently approved AfCFTA Protocol on Investment, which at art. 19 mandates AfCFTA State Parties to permit all transfers relating to an investment to be made freely and without unreasonable delay in and out of the territory after payment of the respective taxes and duties. However, the Protocol has not yet entered into force because not opened yet for ratifications. But the problem will arise in future.

The new foreign currency retention Directive will take effect from 11 August 2023 .