Importers ‘unable’ to use approved foreign currency; CBE reports only 28% of hard currency allocation utilized post-reform

Addis Abeba – Since the introduction of new macroeconomic reforms in late July 2024, less than one-third of the $282 million in foreign currency allocated by the Commercial Bank of Ethiopia (CBE) to importers has been utilized.

In its recent statement, the CBE announced that a directive has been implemented since the introduction of new macroeconomic reforms, allowing commercial banks to competitively purchase hard currency from the market.

This new approach, according to CBE, enables banks to respond quickly to foreign currency requests from customers while improving the efficiency of foreign exchange allocation.

“Over the past two months, the CBE has been actively buying foreign currency from the market at competitive rates and providing it to importers to promote import-export activities,” reads the statement.

From 29 July to 1o October, 2024, the bank allocated a total of $284 million to its customers across four rounds.

Of this amount, $208 million was approved for importing raw materials and consumer goods such as food and medicine, $42 million for machinery purchases, and $18 million for spare parts.

However, the CBE reported that the utilization of these allocated funds has been slow, with only 28% of the foreign currency being used by customers.

In an interview with Addis Standard, Eyasu Nekatibeb, Marketing Manager at Kality Metal Products PLC, voiced his concerns about the challenges his company encounters in accessing foreign currency allocated by the bank.

Despite the bank’s claims of allocating foreign currency to customers, Eyasu noted that the issue lies not with the customers but with the bank’s slow decision-making process.

“Despite fulfilling all the necessary conditions and submitting the required paperwork as instructed by the bank, we have yet to receive the allocated foreign currency,” he explained. “The bank’s response has consistently been that the matter has been forwarded to higher authorities.”

Eyasu further highlighted a change in procedure regarding the opening of Letters of Credit (LCs). 

“Previously, LCs were required to be opened within 15 days of foreign currency approval,” he stated. “However, this deadline has been removed, and the necessary documents for opening an LC in our case are still pending.” 

Solomon Mulugeta, General Manager of the Ethiopian Association of Basic Metal and Engineering Industries (EABMEI), emphasized that the issues can be categorized into two main problems.

First, he noted, “Foreign currency is not being fully released.”

“Secondly, the allocation of foreign currency goes through numerous procedures, and the funds are not released at a pace suitable for industries,” he explained. “On the other hand, every industry needs to quickly turn over the currency it receives.”

A marketing manager of a company involved in importing agrochemicals explained to Addis Standard why some importers are hesitant to utilize foreign currency allocated by commercial banks.

He emphasized that importers are required to purchase hard currency at the prevailing exchange rate on the day of payment, rather than on the day the foreign currency is approved.

“This exposes importers to higher costs,” he stated.

The marketing manager elaborated that importers typically must make payment to the foreign seller after a letter of credit (LC) is established and the seller submits the necessary shipping documents to the bank.

While payment terms can vary based on the specific conditions outlined in the LC, he indicated that payment usually occurs once the seller has met those terms.

The marketing manager also noted that from the initial order to final payment, a minimum of two months can elapse.

“Given the significant rise in the official market exchange rate over the past two months, it may be wiser to wait until the rate stabilizes before proceeding with transactions,” he indicated.

Introduced on 28 July 2024, the new macroeconomic reforms aim to address long-standing distortions in Ethiopia’s economy by transitioning from a crawling peg exchange rate system to a market-based foreign currency regime.

Before this shift, commercial banks traded the Ethiopian birr at a rate of around 57 to the US dollar. By 12 October, 2024, the weighted average selling exchange rate had soared to 125 birr per dollar.

However, authorities emphasized that the sharp increase in the official exchange rate has significantly narrowed the gap between the formal and parallel markets.

In early September 2024, Mamo Mihretu, governor of the National Bank of Ethiopia (NBE), revealed that the premium between the official and black markets had dropped from over 100% to just 4% within a month.

“This indicates that the significance and influence of the parallel market are diminishing,” he stated.

The marketing manager also noted that the ongoing conflict in regions like Amhara and Oromia has led to a business slowdown, dampening the appetite of importers. 

He noted that wholesalers and retailers in these regions have been hesitant to distribute agrochemicals to farmers due to security concerns.

A macroeconomist who spoke to Addis Standard on the condition of anonymity argued that this trend is a setback for the government, which transitioned the country from a crawling peg exchange rate system to a market-based foreign currency regime with the aim of alleviating the chronic foreign currency shortages.

“The government anticipated that it could meet the Letter of Credit (LC) demands of importers with the introduction of macroeconomic reforms,” he emphasized. “If importers are unable to utilize the allocated foreign exchange now, the demand for hard currency will accumulate in the future, putting the government in a difficult position.”

Despite the setback, the CBE announced that it will continue to allocate foreign currency to importers. AS