Addis Ababa: Following up on the Government’s recent statement regarding Ethiopia’s economic reform program, the National Bank of Ethiopia (NBE) announced a major revision of the country’s foreign exchange (FX) system effective immediately.
The reform introduces a competitive, market-based determination of the exchange rate and addresses a long-standing distortion within the Ethiopian economy.
The implementation of the reform will be guided by a new Foreign Exchange Directive (FXD/01/2024) being released today.
Ethiopia’s foreign exchange reform is just one part of a wider package of economic reforms that are being implemented and accelerated over the coming months.
The package of reforms-based on the country’s Home-Grown Economic Reform Plan (HGER 2.0)-aim to restore macroeconomic stability, boost private sector activity, and ensure sustainable, broad-based, and inclusive growth.
The foreign exchange reforms being announced today involve significant new policy changes including a shift to a market-based
exchange regime, whereby 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 disorderly market conditions.
According to NBE, The reforms represent a comprehensive set of measures that will support Ethiopia’s current stage of development and its increasing integration with the rest of the world. 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.
While such reform was delayed thus far due to a combination of external and internal factors, the start of a new budget year and the successful re-engagement with key external partners provide a window of opportunity for embarking on this exchange rate reform, the press
release issued by the National Bank of Ethiopia.
The reform in the exchange rate system being introduced today is challenging in several respects but at the same time critically necessary it added.
The prevailing foreign exchange rate system, though initially meant to help ensure a stable exchange rate and low inflation, has instead resulted in the emergence of an unanchored parallel market exchange rate together with high inflation.
The current 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 FX position.
By shifting to a market-based determination of the exchange rate, a number of widespread economic benefits can and will be realized, the Bank said in its statement.
The foreign exchange (FX) reform will benefit millions of Ethiopians in multiple FX-generating sectors including millions of farmers involved in the production of exportable crops (coffee, sesame, pulses, flowers, fruits, vegetables, chat); pastoralists and livestock owners exporting cattle and meat; tens of thousands of artisanal and formal miners engaged in mining activities, particularly of gold among others.
The reform will also help ensure that Ethiopia’s foreign earnings potential is properly captured and repatriated for the benefit of its residents and productive sectors.
FX reform 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 sha
re.
Import substituting industries in the consumer and industrial sectors will be particularly important beneficiaries, in line with the ‘Ethiopia Tamrit’ initiative currently being promoted for multiple local industries.
Source: Ethiopian News Agency