The National Bank of Ethiopia (NBE) has removed fuel from the list of import items that will get first priority in foreign currency allocation. Now the central bank lists only pharmaceutical products under the first priority category.
Importers of medicine and laboratory reagents will be favored to receive foreign currency funding. At the same time, inputs for agriculture such as fertiliser, pesticides, chemicals, seeds and raw material for manufacturing industries fall under the second category. Profit, dividends and transfer of excess sales of foreign airlines, which had been under the second priority list, were pushed to the third category, which consists of lubricants, agricultural inputs, pharmaceutical products, machinery, baby formula and educational materials.
The new directive has arrived at a time when the nation’s foreign currency reserve is depleted. As of March 31, 2020, the gross foreign reserve coverage stood at 1.6 months of imports of goods and services of the current fiscal year. This is down from the 2.4 months of coverage of the foreign currency reserve during the 2018/19 fiscal year.
Foreign currency is a scarce resource that should be carefully managed to ensure its efficient and proper allocation, according to the directive that was released by Yenehasab Tadesse, director of Foreign Exchange Monitoring & Reserve Management at the central bank.
“It’s necessary to require each bank to have transparent and sound foreign currency allocation and management guidelines,” reads the directive, which comes into effect as of October 5, 2020.
The directive requires the banks to apportion no less than 50pc of their total foreign currency allocations for these priority areas. Out of the total allocated value, items under the first priority will get 10pc, while goods and services under the second and the third categories will receive 45pc each.
Categorising items is good, but the category is not exhaustive, according to Habib Mohammed, a financial expert with over a decade of experience.
He also disagrees with the percentage allocation for priority allocations, explaining that banks might not receive requests for such items.
“If they don’t have requests, the central bank compels them to surrender the forex that was allocated to some sectors,” he said.
If the allocation for these priorities is less than half of a bank’s total allocation, it is obliged to surrender the difference to the central bank within the first working days of the next month. In the case of allocated foreign currency for priority areas that goes unused, the bank has to surrender the difference to the NBE within the first five working days after June and December.
There is no way that approved forex cannot be utilised by importers, according to a senior executive at one of the mid-sized banks.
“Forex allocation and prioritisation of sectors is an effect of scarce foreign currency,” he said.
A bank that fails to comply with the directive or breaks the rules will be fined 5,000 dollars for each violation, according to the new directive. The previous directive stated that offenders would be fined 10,000 Br for each violation.
“Making the fine in foreign currency isn’t fair,” commented the bank executive.
The directive has also given the power to the central bank’s governor and the vice governor in charge of the Monetary Cluster to give special priority approval for financial institutions, federal and regional governments and City Administration requests. Bank presidents are also entitled to approve the import of spare parts for manufacturing and agricultural sectors in the case of damage to machinery that causes interruption to production.
This law in some way supports the manufacturing sector compared to the previous directive, according to Habib.
“It also allows importers in the manufacturing sector to get Cash Against Document financing (CAD) [where an importer pays for goods before receiving them],” he said.
Bank presidents can also give approvals to issue import permits for goods shipped before approval or after the expiry of letters of credit (LC) or purchase orders by giving a warning letter to the importer if the case is found acceptable.
A list of items that are exempted from the registration procedure are to be served on-demand. Foreign currency requests from non-resident foreign currency accounts; invisible payments such as consultancy and communications services; retention accounts; travel and salary allowances; suppliers’ credit and external debt repayment are among the areas included in the list.