Understanding the foreign exchange directive from the NBE 💵

On July 29th, the NBE released a new directive called “FOREIGN EXCHANGE DIRECTIVE NO. FXD/01/2024”.

This 107-page document basically details Ethiopia's new foreign exchange auction system, aiming to establish market-based exchange rates and increase transparency in currency allocation.

Here are the main points:

💱 Market-based exchange: Banks can freely trade foreign currencies at negotiated rates.

💼 Exporters' FX rules: Exporters must convert 50% of earnings to Birr; 50% can be retained for 30 days.

🔄 Simplified FX accounts: Easier rules for opening foreign currency accounts, with fewer restrictions for residents and institutions.

💹 Non-bank FX bureaus: Independent non-bank entities can now operate foreign exchange bureaus.

🌍 Franco valuta imports: Imports allowed without using domestic FX, under specific conditions.

🏦 Resident FX accounts: Residents can open foreign currency accounts with a minimum balance of $100 or equivalent.

🛑 Capital controls: Residents need NBE approval to hold foreign currency accounts abroad and repatriate investment profits.

📉 External loans: Exporters and investors can borrow abroad if debt-to-equity ratio is under 60:40, with NBE approval.

📍 Special Economic Zones: Companies in these zones may have relaxed FX retention rules, but not 100%.

✈️ Travel FX allowances: Travelers can obtain FX with valid documents, loaded onto cards or as cash, valid for two years.

So why is this a huge deal for Ethiopia’s tech scene?

Previously, foreign exchange was tightly controlled with strict surrender requirements and limited access to FX accounts.

Companies had to convert most of their earnings into Birr, and non-bank entities couldn't operate in the FX market.

Now, the new rules allow more market-based trading, let companies retain more of their FX, and open up the market to non-bank participants, making it easier for businesses and individuals to access and manage foreign currency.

For example, when I met with Addis Alemayehou, an Ethiopian entrepreneur running a startup studio, he told me he had to use his personal U.S. bank account to pay for all the cloud expenses of his startups.

Imagine not being able to pay for your Shopify account or Google Cloud because you are not allowed to have a dollar account 😳.

While this looks to be a great reform, let’s see how people react to it.

Lovers VS Haters 🥊

I tried to gauge the temperature from different entrepreneurs I met and what I was seeing on social media.

This survey was taken from the Telegram group of ethioblackmarket.com, a major website documenting the black market rate.

If you look at the numbers, exactly 50% are excited or neutral, and 50% are completely against it.

I asked one Ethiopian entrepreneur what she was thinking of the directive and this was her answer:

Here is another negative opinion from a YouTube comment on the NBE video:

Other people are much more optimistic:

If you have time, check out the full Tweet. It concentrates most of the arguments pro-directive.

While it is clear that Ethiopia needs such a reform to truly unlock its potential, it is not clear if this is the right timing.

Only time will tell 🔮