Ethiopia allows payments in foreign currency

The macroeconomic committee recently set up the new reformist Prime Minister Abiy Ahmed of Ethiopia on Wednesday has passed a directive that allows payments in foreign currently for selected business areas.

Now foreigners can make payments in foreign currency for services such as guest houses, hospitals etc…The list of business that are eligible to accept payments in foreign currency has also been expanded to include airport telecom services, chartered private airlines, guest houses, specialized clinics & hospitals serving foreign clients. This is learnt from a tweet by Fitsum Arega, the Chief of Staff of Prime Minister Abiy.

The Committee also removed the current diaspora account limit of USD 50,000. Diaspora account holders can now save unlimited amount in foreign currency.

“The central bank of the country, National Bank of Ethiopia’s purchase of 30% of the foreign currency earnings of the private banks will be at mid-rate instead of the current buying rate,” Mr. Fitsum twitted.

In a related development the Macroeconomic Committee has also made a decision to increase the interest rate for the private banks on the mandatory bond purchase from 3% to 5%.

This is understood from the twits of Fitsum Arega, the chief of Staff of Prime Minister Abiy. “The Macroeconomic Committee chaired by PM Abiy Ahmed met today. The Committee raised the interest rate yield for “27% NBE bill” that requires private banks to purchase National Bank of Ethiopia (NBE) bonds from current 3% to 5%,” he twitted.

Since 2011 it has been mandatory by law for Ethiopian private banks to allocate 27% of their every loan for the purchase of NBE’s bond. In addition, it is mandatory for all private banks to deposit to NBE 15% of their lending money as liquidity requirement without any interest.

Meanwhile the directive of the government has been subject to critic by the private bank officials who claim that blocking that much of their money for only 3% interest rate has negatively affected their lending capacity and profitability.

The banks have also been complaining that they could have lent that money to the private sector with a minimum interest rate of 12% and make more profit.

The introduction of the bond has awaken the banks to utilize their maximum capacity and forced them to go extra miles to look for deposit, more customers, different means of income and expense reduction, according to a research paper by Mintesnot Seyoum and Semeneh Bessie (PhD) published in 2018 entitled, ‘The Impact of National Bank of Ethiopia’s 27% Bond Purchase Directive on Credit Performance and Profitability of Private Banks’.

“…It is advisable for the government to strength such means of capital mobilization that is double sword. On one hand it encourages the banks to compete for deposit mobilization, approach the areas that didn’t have bank coverage, give better customer oriented services to attract more customers and use their resource effectively. On the other hand the money from this bond goes to the development of the country by building mega project that will help the countries growth,” the research paper stated.