The Ethiopian government has announced the implementation of a market-based exchange rate system marking a significant shift in the country’s economic policy.
This means 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 (National Bank of Ethiopia) making only limited interventions to support the market in its early days and if justified by disorderly market conditions.
According to a statement released by the National Bank of Ethiopia (which is the Central Bank of Ethiopia), there is now a complete removal of rules governing banks’ allocation of foreign exchange while non-bank foreign exchange bureaus are henceforth free to engage in the buying and selling of foreign currency cash notes at market rates.
The shift means an end of the surrender requirements to the NBE, allowing foreign exchange to be retained by exporters and commercial banks and thus substantially boosting FX supplies to the private sector.
Moreover, Ethiopian residents are now allowed to open foreign currency accounts based on remittance inflows, transfers from abroad, FX-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.
The National Bank of Ethiopia, which in 2022, as reported by BitKE, introduced tight currency controls to protect the exchange rate, says it is relaxing various rules on the amount of foreign currency cash notes travelers may carry when travelling into or out of Ethiopia.
#Ethiopia issues tight capital controls on currency movement – limits birr holding amount to only 3,000
— If foreign currency exceeds $4,000 or equivalent in other convertible foreign currency, he/she has to present a custom declaration – @BitcoinKE | https://t.co/nQHXxKzqF9— EthiopiaOnline (@EthiopiaOnline) September 29, 2022
Ethiopia, with a GDP of $126.8 billion, is also soon opening its securities market to foreign entities.
The reforms are said to be part of the broader Home-Grown Economic Reform Program (HGER 2.0) aimed at modernizing the economic framework and addressing long-standing structural issues.
According to a separate statement by Prime Minister, Abiy Ahmed, the new exchange rate system aims to align the Ethiopian currency with market realities thus addressing foreign exchange shortages and removing constraints on economic growth.
Macro-Economic Reform Program Policy Statement pic.twitter.com/5QyfItMiHs
— Abiy Ahmed Ali 🇪🇹 (@AbiyAhmedAli) July 28, 2024
The government anticipates that this move will enhance the competitiveness of the Ethiopian economy by encouraging private-sector investment and stabilizing inflation.
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