The Ethiopian government, led by Prime Minister Abiy Ahmed, has introduced new regulations tightening controls on foreign investors looking to repatriate earnings. The latest directives from the National Bank of Ethiopia (NBE) aim to regulate the outflow of foreign currency and stabilize the country’s foreign exchange reserves, which have been severely impacted by economic pressures, rising inflation, and a limited forex market. These measures are part of broader economic reforms intended to modernize Ethiopia’s economy while safeguarding its financial stability.

Under the new regulations, foreign investors operating in Ethiopia must navigate a series of stringent requirements before repatriating profits, dividends, or proceeds from asset sales. Notably, these new rules also bar Ethiopian nationals from holding or managing foreign currency accounts outside of the country. For a country that has long controlled its economy with tight restrictions, these changes signal a critical phase as Ethiopia attempts to balance economic liberalization with safeguarding its vulnerable financial system.

Key Provisions in the NBE’s Directive No. FXD/01/2024

Issued in July 2024, the NBE’s Foreign Exchange Directive No. FXD/01/2024 enforces several new requirements for foreign investors who wish to repatriate funds. Some key highlights include:

1. Proof of Tax Compliance: Before transferring profits or dividends out of Ethiopia, foreign investors must present tax receipts proving that all local taxes on their earnings have been duly paid. This measure is likely aimed at maximizing tax revenue and ensuring compliance.
2. Documented Board Approval: Investors must provide authenticated minutes from board meetings or equivalent management bodies that have sanctioned the distribution of profits or dividends. These minutes must bear the signatures of the board chairperson or secretary. This additional administrative step underscores Ethiopia’s emphasis on formalizing business practices and verifying legitimacy.
3. Certified Financial Statements: Investors are required to submit audited financial statements from an independent third-party auditor authorized to operate in Ethiopia. This condition ensures financial transparency and compliance with local auditing standards, thereby minimizing potential tax evasion or financial misrepresentation.
4. Capital Registration and Business Licenses: Investors are mandated to present a valid business license, a capital registration letter issued by the NBE or Investment Authority, as well as other documentation that the NBE may deem necessary. This requirement aims to validate the legality and registration status of foreign investments.
5. Restrictions on Foreign Currency Accounts: Foreign companies holding foreign currency accounts in Ethiopia are not allowed to overdraw these accounts. In addition, Ethiopian nationals are strictly prohibited from maintaining foreign currency accounts abroad without explicit authorization from the NBE.
6. Conditions on Repatriating Capital from Business Closure: If an investor decides to wind down operations in Ethiopia, repatriating capital requires NBE approval. They must provide formal resolutions from shareholders, an authenticated liquidation report, and a license revocation confirmation from the Ministry of Trade, among other documents. This stipulation aims to regulate capital outflows during business closures and secure accountability.
7. Portfolio Investment Rules: The new directive also specifies ownership limits for foreign portfolio investors, including minimum mandatory holding periods before they can exit their investments. This provision likely intends to stabilize Ethiopia’s capital markets and avoid sudden capital outflows that could destabilize the economy.

Rationale Behind the Tightened Forex Controls

Ethiopia’s move to impose these restrictions is influenced by ongoing challenges in the country’s economic landscape. For decades, the country has maintained a state-controlled economic model that restricted foreign direct investment and controlled capital flows. However, under Abiy Ahmed’s administration, Ethiopia has gradually opened up key sectors to foreign investment, including telecommunications, manufacturing, and financial services. This liberalization drive, however, coincides with significant economic challenges:

• Foreign Currency Shortages: Ethiopia’s forex reserves have been under pressure, with significant shortages limiting the country’s ability to import essential goods, including fuel and medicines. These constraints have led the government to seek new avenues for forex conservation, of which the latest directive forms a part.
• Mounting National Debt: Ethiopia’s debt burden, both domestic and external, has created a financial squeeze, reducing the government’s ability to finance development projects and manage currency volatility. As a result, these forex regulations aim to reduce capital outflows and retain foreign investment within the country for a longer duration.
• Inflation: The country has been grappling with inflation, primarily driven by food and energy costs, exacerbating the challenges faced by Ethiopian households and reducing purchasing power. The restrictive measures on currency outflows seek to ease inflationary pressures by ensuring that forex reserves remain in Ethiopia, cushioning the currency against devaluation.

Implications for Foreign Investors

The stringent repatriation rules may impact investor sentiment, as they could be viewed as obstacles to capital mobility and profitability. For instance:

1. Increased Compliance Burden: Foreign investors must navigate a more complicated regulatory landscape, including a requirement for documented board resolutions and audited financials. These processes could delay or hinder the repatriation process, which may deter new investors.
2. Enhanced Cost of Doing Business: The need for additional documentation, tax compliance verification, and audits raises operational costs for foreign businesses, potentially reducing the appeal of Ethiopia as an investment destination.
3. Investment Stagnation: Mandatory holding periods for portfolio investors could discourage short-term investments, impacting market liquidity and foreign inflows into Ethiopia’s capital markets. Investors may be wary of restrictions on exit, which could influence their willingness to invest in Ethiopian securities or enterprises.

However, despite these restrictions, Ethiopia’s opening of critical sectors has driven optimism among long-term investors who see growth potential in Ethiopia’s vast, young population and untapped markets. As the country diversifies its economy, including substantial investments in infrastructure and telecoms, certain sectors may remain attractive, particularly for investors focused on long-term opportunities.

Strategic Sectors Open to Foreign Investment

The Ethiopian government has strategically liberalized key sectors in an attempt to attract foreign capital while safeguarding national interests. These sectors include:

• Telecommunications: Ethiopia has opened its telecommunications sector to foreign investments, with Safaricom being one of the major players entering the market. This opening has introduced mobile money services and increased connectivity, which are pivotal in driving financial inclusion.
• Manufacturing and Agriculture: The Ethiopian government has identified manufacturing and agriculture as priority sectors, focusing on value addition and export-oriented industries. Incentives such as tax breaks and favorable lease rates in industrial parks have been introduced to attract investors to these sectors.
• Renewable Energy: Ethiopia’s abundant renewable energy resources, including hydroelectric power, wind, and solar, have attracted foreign investments. Projects like the Grand Ethiopian Renaissance Dam are critical to achieving energy self-sufficiency, and the government is looking to partner with foreign investors to fund further renewable initiatives.

The Broader Context of Ethiopia’s Economic Reforms

Prime Minister Abiy Ahmed’s government has been actively pursuing economic reforms to address longstanding structural issues. Key reforms include:

1. Privatization of State-Owned Enterprises: The government has initiated plans to privatize major state-owned enterprises, including Ethiopian Airlines, Ethio Telecom, and key sugar industries. This move is intended to increase efficiency, attract foreign investment, and improve service delivery across the board.
2. Capital Market Development: Ethiopia is in the process of establishing its own stock exchange, which is anticipated to launch soon. The stock exchange is expected to provide local businesses with capital and attract foreign portfolio investment, marking a significant milestone in Ethiopia’s financial sector development.
3. Trade and Regional Integration: Ethiopia is a significant player in the African Continental Free Trade Area (AfCFTA), and it seeks to benefit from regional trade to boost exports and increase economic resilience. Through AfCFTA, Ethiopia aims to gain access to broader markets, driving economic growth through increased trade and investment flows.

Challenges and Opportunities for Investors

Despite these opportunities, foreign investors face several challenges in Ethiopia. Political tensions, ethnic conflicts, and periodic protests have raised concerns regarding the country’s stability. Additionally, logistical challenges, such as transportation and supply chain inefficiencies, remain problematic. However, the government’s push toward economic reforms provides hope for improved stability and regulatory clarity, which may ultimately benefit investors willing to navigate these complexities.

Conclusion

Ethiopia’s tightening of forex controls on foreign investors illustrates the government’s careful balancing act between economic liberalization and safeguarding its financial stability. While the new restrictions may seem daunting, Ethiopia’s strategic sector liberalization and economic reforms offer a pathway for sustained economic growth and development. For foreign investors, navigating these challenges will require a long-term perspective, focusing on Ethiopia’s growth potential in telecommunications, agriculture, and renewable energy. As Ethiopia continues to open its doors to foreign capital, the country’s evolving regulatory landscape will shape the nature and pace of its economic transformation.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

29th October, 2024