Foreign Exchange Regulations and Directives in Ethiopia

The National Bank of Ethiopia Establishment (as Amended) Proclamation No. 591/2008 DOWNLOAD

According to the National Bank of Ethiopia Establishment (as Amended) Proclamation No. 591/2008 (herein after the Proclamation), the National Bank of Ethiopia, which is accountable to the Prime Minister, is the major government organ that regulates foreign exchange transactions in Ethiopia. The mandates of the National Bank of Ethiopia in relation to foreign exchange includes,

  1. to formulate and implement exchange rate policy;
  2. to manage and administer the international reserves of Ethiopia. The reserve is managed to cover payments of imports, payment of foreign debt commitments (such as export) and payments for basic services (Article 19 of the Proclamation);
  3. to set limits on gold and silver bullion and foreign exchange assets which banks and authorized dealers can hold;
  4. to set limits on the net foreign exchange position and on the terms and the amount of external indebtedness of banks and other financial institutions;
  5. to accept deposits of any kind from foreign sources;
  6. to act as banker, fiscal agent and financial advisor to the Government;
  7. to take such steps to establish, modernize, conduct, monitor, regulate and supervise payment, clearing and settlement systems;
  8. to  exercise such other powers and functions to execute its purposes as central banks customarily perform; an
  9. to monitor foreign exchange transactions of banks, insurance companies and other financial institutions through on-site inspection and off-site surveillance.

Based on its power to issue directives the NBE has enacted several directives on the regulation of foreign exchange. The directives determine the conditions, limitations and circumstances under which a person/entity can possess and utilize foreign currency or instruments of payment pertaining to foreign exchange. Moreover, the directives regulate the terms and conditions for transfer of foreign currency to and from Ethiopia especially in relation to export and import. Some of the directives used by the NBE include;

Directives No. FXD/48/2017, directives for amendment of retention and utilization
of export earnings and inward remittance
DOWNLOAD
Directive No. FXD/46/2017, directives for transparency in foreign currency allocation and foreign exchange management DOWNLOAD
Directive No. FXD/49/2017, directive to limit on the birr and foreign currency holding in the territory of Ethiopia DOWNLOAD

Some Highlights

Here are some highlights of the Regulation of Foreign Exchange (the Proclamation and the above Directives)

Definition

(Article 2(6,5, and 13) of the Proclamation)

Foreign exchange means any foreign currency (any currency other than the Ethiopian legal tender); cheques, bills of exchange, promissory notes, drafts, securities, and other negotiable instruments, expressed in foreign currency; and bank balances in account held in foreign currency or assets in the form of foreign account crediting or set-off arrangements, expressed or payable in foreign currencies provided they are acceptable by the National Bank.

Who can engage in foreign exchange transactions?

(Article 2(1 and 13) and Article 20 (1) of the Proclamation)

A foreign exchange transaction means:

a. the transfer, borrowing, lending, assignment, exchange, purchase, sale, receipt, payment or crediting of foreign exchange; and

b. the conclusion of any contract, agreement, arrangement or understanding, as a result of which any foreign exchange is transferred, borrowed, lent, assigned, exchanged, purchased, sold, received, paid or credited within or outside Ethiopia;

According to article 20(1) of the proclamation, there are three ways a person/entity could engage in a foreign exchange transaction. The first is a person/entity may be an ‘authorized dealer’ which means that such person/entity other than banks is authorized by the NBE to engage in foreign exchange transaction. The second way is through authorized banks which can engage in foreign exchange transaction. Third, a person or entity may have a special permission of the NBE to engage in foreign transaction. From these three ways, banks are mostly used to settle a foreign exchange transaction commitment.   

The responsibility of banks

(Article 3 and 5 of Directives No. FXD/46/2017)

Responsibility of the Banks include: (Article 3 of Directives No. FXD/46/2017)

The banks have the following responsibilities;

  • Developing and putting in place the overall foreign exchange operation management guidelines in line with the NBE’s directives pertaining to foreign exchange transactions.
  • Reviewing at least monthly a bank’s overall foreign exchange exposure to ensure that it is maintained at prudent levels and is consistent with available resources
  • Ensuring that adequate resources both technical and human are available for evaluating and controlling these operations.
  • Ensuring adherhance to the lines of authority, resonisbility and limits that the board established.
  • Submitting a copy of an internal audit (Article 5 Directives No. FXD/46/2017) which is conducted semi annually and trough surprise checks) to the NBE
  • Submitting a weekly return of its Foreign Exchange Exposure to the Foreign Exchange Monitoring and Reserve Management Directorate not later than Tuesday of the following week.
  • To send the foreign currency application registration detail as per the attached format and copy of pro-forma invoice weekly through secured email address to be notified by NBE.

Foreign Exchange Allocation for importers and Priorities

(Article 6 of Directives No. FXD/46/2017)

Importers are, first, required to register an application for foreign exchange allocation within the commercial banks. In the allocation of foreign currency a bank shall give priority to the following import items and payments, among them, on first come first served basis:

  1. fuel, motor oil, lubricants and LGP gas
  2. fertilizer
  3. agricultural inputs and machineries which include seeds and pesticides, irrigation pumps, animal feeds, and machineries and equipments.,
  4. pharmaceutical product (medicine, laboratory equipments and reagents, and medical equipments and appliances),
  5. factories’ requests for procurement of machineries, equipments, spare parts, raw materials and accessories;
  6. import of nutritious food for babies
  7. spare part for construction machineries for own use construction companies whose total value not exceeding USD 50,000
  8. educational materials (exercise book, ball pen, pencil and printing papers)
  9. imports of chemicals
  10. profit and dividend transfer
  11. transfer of excess sales of foreign airlines
  12. sales from share and liquidation of companies by FDI

Despite the above, priorities a bank must sale foreign currency to its all other customer’s on the basis of first come first served bases. However the importer has to lodge a request for foreign currency only in one bank. Importers are prohibited to submit application for foreign currency in more than one bank. Further, the importer must adhere to any provisions of proclamation, regulation and directives. Any importer who fails to comply will be black listed from six month up to two years.    

On the other hand, the following goods are exempted from the registration procedure and are granted on demands.

  1. Foreign currency request from non-residents foreign currency and non-resident transferable birr account;
  2. Foreign currency accounts of nonresident Ethiopian and nonresident Ethiopian origin;
  3. retention accounts;
  4. forex request for all transactions set under the operation of forex bureau directives no. FXD/17/2001;
  5. invisible payments such as consultancy, commissioning, installation, and royalty fees, payment of services and travel payment by non-residents non transferable account, communication and other service payments, aviation services payments and associated costs, cargo handling, freight and other associated costs, payments on exports freight and transit services;
  6. other payments authorized by the NBE especially external debt payment obligations and supplier’s credit; and
  7. salary transfer of foreign nationals.

Retention and Utilization of Foreign Currency for Exporters

(Directive No. FXD/48/2017)

An exporter has a right to retain their foreign exchange earnings but only through retention accounts. In plain word, an exporter can obtain the foreign currency which is paid to him by the buyer, provided that he/she has a retention account in one of the banks authorized by the NBE.

Retention Accounts

There are two types of foreign exchange retention accounts (current accounts) which are designated as “foreign exchange retention account A” and “foreign exchange retention account B”. An exporter with an Account A can retain 30% of the account balances for an indefinite period of time. On the contrary, an exporter with Account B can retain 70% of the account balances for up to 28 days. After the 28 days, any balance will automatically be converted into local currency in the next working day by the customer’s bank using the prevalent buying exchange rates.

Note that, the exporter must give a written authority, which should clearly stipulate the type of account to be opened, for the bank.    

Local merchants or entities may also create a retention account, provided that they are authorized by the NBE, to collect credit card/debit card/prepaid card/payments for goods and services they sale; and cash notes for goods and services they sale such as hotels, duty free shops, airline ticket offices and travel agents, tour operators, and shops operating at the airports on the airside.

Note that banks, which are authorized to operate retention accounts, are required to send to the NBE the aggregate balances of foreign exchange held under retention account “A” and “B”.

Utilization of Retention Accounts

In relation to the utilization of retention accounts, accounts A and B must be used to finance direct business services related and current payments such as;

  1. Import of goods except vehicles, and related services in relation to the business including: payment for expenses incurred on exporting of goods and services, payment for promotional activities, payment for subscription to business publications, payment for training fee and educational expenses, payment for services by non-residents, payment to import materials required for export packaging labeling and auxiliary items.
  2. Payment for settlement of external loan and supplier’s credit
  3. Payment to refund tour operators
  4. Service payments for consultants, experts or professional who rendered services.
  5. Other payments against transaction that might be approved by the NBE from time to time.

Prohibitions

According to Directives No. FXD/ 46/2017, some of the prohibitions in relation to foreign-exchange include

  • A bank by no means shall allocate foreign exchange collected from an exporter to import business of the same outside the proper procedure stipulated under article 6 above;
  • A bank is prohibited from approving a purchase order under CAD without collecting full amount in Birr of the purchase order value except for import application made by the manufacturing sector.
  • A bank is prohibited from approving L/C application without collecting minimum of 30% of the L/C value in cash upfront. Banks however may exempt importers from the manufacturing sector from this restriction;
  • A bank is prohibited from releasing the CAD documents to their customers without effecting payments to suppliers based on the modality of payments as per the international practices under such circumstance the bank shall issue utilization ticket within three days to confirm the transfer of foreign currency.
  • A bank is prohibited to issue permit for goods shipped before approval after expiry of L/C and purchase order (CAD). However, extension of validity of L/C or purchase order is allowed before shipment for goods for good cause.
  • A bank is prohibited to decline registration request by importer
  • A bank is prohibited to process import application for approved foreign currency exceeding the period of 15 consecutive days from the date of approval.
  • A bank is prohibited to restrict customer’s application in terms of number of pro-forma or value of invoices.
  • A bank is prohibited to attach foreign exchange allocation with any other services in the bank as long as the customer fulfils required documents for import.
  • A bank is prohibited to accept request on change of items and suppliers after registration of proforma invoice.

Foreign Currency Hold limits

(Article 3, and 4 of Directive No. FXD/49/2017)

According to article 3 of Directive FXD/49/2017, no person residing in Ethiopia is allowed to hold foreign currency for more than 30 days since the date of acquisition and/or declaration of the foreign currency. Thus, any person residing in Ethiopia cannot possess a foreign currency for more than 30 days. Further, a person residing in Ethiopia entering into the country from abroad carrying foreign exchange currency exceeding USD 1000 or equivalent in any other convertible foreign currency should declare by using foreign currency Customs Declaration Form prepared for this purpose on arrival at Airport or any other entry point into the country.

On the other hand, any person not residing in Ethiopia who enters into the country carrying foreign currency exceeding USD 3,000 or equivalent in any other convertible foreign currency should declare the foreign currency in his possession by using foreign currency Customs Declaration Form prepared for this purpose on arrival at airport or any other entry point.  

Therefore, there are two major rules relating to the regulation of foreign currency hold limits. The first is that any person cannot possess foreign currency for more than 30 days. Further, persons residing in Ethiopia and persons not residing in Ethiopia are required to declare foreign exchange Customs Declaration, where such persons are holding more than the limits specified above. However, a person not residing in Ethiopia may hold his foreign currency up to the visa validity period provided that he/she has declared foreign currency customs declaration, for holding more than USD 3,000 or the equivalent of other foreign currency.

In relation to the permissible amount of foreign currency for travel abroad, there are also two major rules. The first is that any person residing in Ethiopia is allowed to carry with him foreign currency for which he can produce a bank advice or a foreign currency customs declaration. Second, any person not residing in Ethiopia who is travelling abroad and carry with him foreign currency exceeding USD 3,000 or the equivalent in other convertible foreign currency is required to produce a bank advice or a foreign currency customs declaration declared at the entry point.    

Penalties in relation to violation of the law in relation to foreign currency

(Article 26 of the Proclamation)

Whosoever in violation of the provisions of the Proclamation or regulations or directives issued pursuant to the Proclamation is criminally liable if he/she:

  1. engages in transactions of foreign exchange or fails to declare to a bank or authorized dealer when he acquires foreign exchange or the right to receive foreign exchange;
  2. receives or effects payments in foreign exchange;
  3. delays his receipt or extinguishes his right to receive foreign exchange;
  4. leaves or attempts to leave or enters or attempts to enter Ethiopian territory carrying Ethiopian currency in excess of the amount fixed or authorized by the National Bank; or
  5. is found carrying foreign exchange in excess of the amount fixed or authorized by the National Bank;
  6. in any other manner violates or obstructs the implementation of the Proclamation or regulations or directives issued pursuant to this Proclamation;

A violation of one of the above rules entails confiscation of the property which the offense is committed and punishment in accordance with the Criminal Code of Ethiopia and Article 26(2) of the Proclamation.

Some of the punishments by virtue of article 26(2) of the Proclamation include:

  • Rigorous imprisonment not exceeding 15 years and fine not less than Birr 50,000 and not exceeding Birr 100,000 where the accused misused the power of his official position or where he committed the offence with intent to improperly amass wealth or where the offence is committed repeatedly;
  • Where the offence is committed by a body corporate, the fine may be raised to six times the value of gold, currency, security, goods or any other property with which the offence is committed;
  • Whosoever commits over or under invoicing of imported or exported goods shall be punishable with fine up to three times the value of the property and with rigorous imprisonment from 15 to 25 years; and
  • Where any offence under the Article is committed by a body corporate, the director or any other official who was, at the time of the commission of the offence, responsible for the management of the body corporate shall be jointly liable and shall be punishable with rigorous imprisonment from seven to ten years and with fine from Birr 50,000 to Birr 100,000, unless he can prove sufficiently to the court that he had no knowledge and could not, by the exercise of reasonable diligence, have had knowledge of the commission of the offence.

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