Ethiopia’s National Bank has announced a major overhaul of the country’s foreign exchange system, marking a significant shift towards a market-based economy. The reforms, effective immediately, aim to address long-standing economic distortions and attract foreign investment.
The new policy, outlined in a press release on July 29, 2024, introduces a competitive, market-determined exchange rate and eliminates various restrictions on foreign currency transactions. This move is part of a broader package of economic reforms based on Ethiopia’s Home-Grown Economic Reform Plan (HGER 2.0).
Key changes include allowing banks to freely negotiate foreign currency rates with clients and among themselves, ending surrender requirements to the National Bank, and removing import restrictions on 38 product categories. The reforms also introduce non-bank foreign exchange bureaus and relax rules on foreign currency accounts for residents.
“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 National Bank stated.
The reforms aim to address several challenges faced by the Ethiopian economy. The previous system, intended to ensure a stable exchange rate and low inflation, instead led to the emergence of an uncontrolled parallel market and high inflation rates. It also resulted in large-scale contraband exports and diverted foreign exchange earnings away from the formal banking system.
The National Bank argues that the shift to a market-based exchange rate will benefit various sectors of the economy. “FX reform will benefit millions of Ethiopians in multiple FX-generating sectors,” including farmers, pastoralists, miners, manufacturing sector employees, and those in the services and tourism industries.
The reforms are expected to boost Ethiopia’s attractiveness to foreign investors. The National Bank noted, “Ethiopia stands out among Africa’s largest economies and among many emerging markets for having a regulated exchange rate system marked by controls and FX supply shortages.” By addressing this issue, the government hopes to remove a major deterrent for foreign investors.
To manage the transition, the government has announced temporary measures to mitigate potential negative impacts. These include subsidies for essential imports such as fuel, fertilizers, medicine, and edible oil, as well as enhanced financial support for civil servants and expansion of the Productive Safety Net Program.
The reforms are backed by a substantial financial package from international partners. “A financial package of $10.7bn offered by Ethiopia’s external partners to support our reform—the single biggest ever coordinated commitment of support by international partners towards Ethiopia,” the National Bank revealed. This includes exceptional financing from the IMF, World Bank, and other creditors.
The IMF’s macroeconomic assessment projects significant benefits from these reforms. Over the next four years, the IMF forecasts annual growth of nearly 8 percent, inflation reduction to 10 percent, increased fiscal revenue, reduced debt, and substantial increases in exports, foreign direct investment, and foreign exchange reserves.
However, the transition to the new system will require careful management. The National Bank has committed to regular press briefings and updates to share information with the public and foreign exchange market participants. It will also enhance its monitoring and surveillance responsibilities to ensure compliance with the new directives.
The reforms represent a pivotal moment in Ethiopia’s economic development. As the National Bank stated, “As Ethiopia marks this transformative moment in its economic journey to becoming among Africa’s most vibrant, open, and competitive economies, NBE calls upon all key players in the foreign exchange, banking, and business community as well as the broader public to play their part in making this reform a genuine success for the benefit of all Ethiopians.”
