Legal Insight: New Developments in Ethiopia’s Foreign Exchange Framework

Following the comprehensive macroeconomic reform program, the National Bank of Ethiopia (NBE) has undertaken significant measures aimed at liberalizing the foreign exchange regime and fostering the development of a more efficient and market-oriented forex system. A central pillar of these reforms has been the gradual removal of current account restrictions and the introduction of regulatory flexibility designed to stimulate foreign exchange inflows, encourage investment, and enhance market confidence.

Under the newly issued notice on relaxation of foreign exchange directive (hereinafter referred as “ the Notice”) , one of the most notable changes is the removal of the previous minimum requirement of USD 100,000 to open a foreign currency savings account for resident and non-resident Ethiopians. This reform substantially broadens access to foreign currency banking services, promotes financial inclusion, and is expected to encourage greater formalization of foreign currency holdings within the banking system.

The Notice also introduces important developments concerning outbound investment. It is widely recognized that many Ethiopian individuals and companies incorporated in Ethiopia have long sought to expand their commercial activities beyond national borders. Historically, regulatory constraints, particularly foreign exchange shortages and strict approval procedures, posed significant barriers. The new framework now permits outbound investment, subject to prior approval from the NBE. This marks a meaningful shift toward outward economic engagement and signals the regulator’s confidence in the evolving stability of the forex market.

Another major reform concerns foreign currency conversion. Individuals residing in Ethiopia are now permitted to convert foreign currency holdings through banks or authorized foreign exchange bureaus without the requirement of presenting a customs declaration. This measure simplifies compliance requirements, reduces administrative burdens, and enhances the liquidity of foreign currency circulating within the formal financial sector.

The Notice  further relaxes outbound remittance rules. Foreign currency account holders may remit up to USD 3,000 abroad. For individuals without foreign currency accounts, outbound remittances remain permissible subject to the submission of supporting documentation, thereby maintaining regulatory oversight while improving flexibility.

In a significant move toward market liberalization, commercial banks are now authorized to enter into forward foreign exchange transactions without seeking prior approval from the NBE. This development is expected to deepen the foreign exchange market, enhance risk management mechanisms for businesses, and support more sophisticated financial operations, particularly for importers and exporters exposed to currency fluctuations.

Exporters also benefit from enhanced flexibility. They are now permitted to receive advance payments from buyers, provided that the terms and conditions are contractually agreed upon. Moreover, exporters may accept payments for future exports as long as such payments are clearly designated as advance payments and properly reference the type of commodity, invoice number, or contract number. This reform is likely to improve exporters’ working capital positions and strengthen trade competitiveness.

Banks are now allowed to guarantee private external loans, provided that the guarantee does not exceed ten percent of the company’s capital. This measure facilitates access to external financing while prudently managing systemic risk exposure within the banking sector.

Importantly, the Notice confirms that investors may repatriate dividends or net profits without obtaining prior NBE approval, provided that all regulatory requirements are fulfilled. This reform is particularly significant for foreign direct investment (FDI), as ease of profit repatriation is a critical determinant in investor decision-making and long-term capital commitment.

Finally, the cash holding limit for independent foreign exchange bureaus has been increased from 10 percent to 25 percent of their capital. Any excess beyond this threshold must be sold to commercial banks. This adjustment enhances operational liquidity for forex bureaus while ensuring that excess foreign currency is channeled back into the formal banking system.

Collectively, these measures reflect a deliberate and structured transition toward a more liberalized and market-responsive foreign exchange regime. While regulatory oversight remains in place, the direction of reform clearly signals Ethiopia’s broader commitment to financial sector modernization, improved investor confidence, and deeper integration into the global economy.