Ethiopia Ends Currency Controls, Embraces Market-Based Exchange Rate System

The Ethiopian government has announced the implementation of a market-based exchange rate system marking a significant shift in the country's economic policy.

Ethiopia has announced the implementation of a market-based exchange rate system, a significant shift in the country’s economic policy.

Banks are now permitted to buy and sell foreign currencies from/to their clients and among themselves at freely negotiated rates. The National Bank of Ethiopia (NBE) will only intervene to support the market in its early days or if justified by disorderly market conditions.

A statement from the NBE, which is also the Central Bank of Ethiopia, announced the complete removal of rules governing banks’ allocation of foreign exchange. Non-bank foreign exchange bureaus are also permitted to engage in the buying and selling of foreign currency cash notes at market rates.

The shift also entails an end to the surrender requirements to the NBE, allowing foreign exchange to be retained by exporters and commercial banks, which will substantially boost FX supplies to the private sector.

Furthermore, Ethiopian residents are now permitted to open foreign currency accounts based on remittance inflows, transfers from abroad, FX-based salary or rental income, and for other specified cases. They are also able to use such foreign currency accounts for foreign service payments.

The NBE, which introduced tight currency controls in 2022 to protect the exchange rate, announced that it is relaxing various rules on the amount of foreign currency cash notes travelers may carry when entering or leaving Ethiopia.

Ethiopia, with a GDP of $126.8 billion, is also set to open its securities market to foreign entities.

These reforms are part of the broader Home-Grown Economic Reform Program (HGER 2.0), which aims to modernize the economic framework and address long-standing structural issues.

In a separate statement, Prime Minister Abiy Ahmed stated that the new exchange rate system aims to align the Ethiopian currency with market realities, 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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