Ethiopia’s Central Bank Provides Long-Awaited Assurance of Currency Convertibility

Central bank nods to long awaited currency convertibility assurance
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The National Bank of Ethiopia (NBE) has affirmed its commitment to providing the long-anticipated guarantee of converting local currency funds into hard currencies for foreign investments classified as “strategic.”

In a directive issued just a week ago, the NBE has permitted the opening and operation of offshore accounts for strategic foreign direct investment projects, particularly in the mining and Public-Private Partnership (PPP) sectors involving substantial capital investments.

The directive also ensures that mining and PPP projects operating within the energy sector can convert their local currency earnings into foreign currency for loan repayments and dividend repatriation.

Until now, investors of all levels lacked government assurance regarding currency conversion when repatriating profits. They were required to navigate the banking system to access foreign currency, as per Fikadu Digafe, Vice Governor and Chief Economist at NBE.

While the new directive guarantees currency conversion for economically impactful projects “at the prevailing official rate,” project owners can only apply for it after “exhausting all means to purchase foreign exchange from banks,” as stipulated in the directive’s regulations.

“The projects should be capital-intensive and have a significant impact on the country’s economy,” explained Fikadu to The Reporter. He anticipates that reaching the profit repatriation stage for such strategic projects will take at least five or six years.

With the Grand Ethiopian Renaissance Dam (GERD) nearing completion and improvements in import substitution and agriculture, Fikadu is optimistic that the economy and foreign currency situation will improve in a few years, providing hard currencies for investors.

“If they won’t obtain the currency from the economy by then, the last resort will be that we will give them priority in foreign currency allocation. This is the main purpose of the conversion guarantee,” he added.

Investors interested in participating in PPP projects have long been seeking such assurances from the government, confirmed Fikadu.

Through officials from the Ministry of Finance, these investors have been urging the NBE to enact this legislation, which would attract foreign investment and instill confidence among investors.

Abebe Gebrehiwot, the head of the PPP unit at the Ministry, mentioned on his social media platform that enabling revenue repatriation through currency conversion was one of the primary concerns raised by foreign investors in Ethiopia.

“Foreign currency has been one of the major bankability requirements,” Abebe wrote on his LinkedIn page.

NBE’s directive designates certain strategic foreign direct investment projects as eligible to establish offshore accounts for “depositing proceeds from their equity and loan financing sources.”

These projects encompass PPP ventures in the power generation and infrastructure sectors with significant investment capital, export-oriented mining projects, and other endeavors of substantial size, job creation potential, and various other factors.

The debt-to-equity ratio for such projects is capped at 80 percent debt and 20 percent equity, in contrast to the 60/40 percent ratio allowed for other investments.

From their offshore accounts, these projects are permitted to make payments for external debt service, insurance and warranty claims, capital or investment expenses, as well as maintenance and related operational costs.

Strategic investors with offshore accounts must report their financial statements to the National Bank of Ethiopia (NBE) on a quarterly basis.

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