The European Chamber speculated that Ethiopia’s market-based currency introduction has the potential to address the country’s longstanding macroeconomic imbalance.
In a press statement EuroCham in Ethiopia issued to EBC, it explained that the gap between formal and parallel markets has currently narrowed to a single digit.
“The current trend observed in the unification of the exchange rates would incentivize the commodity exporter as it allows to rectify the mismatch between the international commodity prices and the domestic prices as well as allow for exporting manufacturers to improve their liquidity position which had been eroded due to the overvaluation of the ETB, while most of the domestically purchased goods and services were already factoring in the black-market rate,” it said.
Hailing Ethiopian National Bank’s (NBE) decision to introduce a market-based exchange rate, eliminate the waiting list and priority ranking for foreign exchange (FX), lift import restrictions on numerous items and delegate more authority to commercial banks for FX management, the chamber believes the bold reform measures will enhance transparency and lead to an increased FX availability for the manufacturing and import-substitution sectors.
EuroCham also said switching the FX back into the formal system will prevent the loss exporters have been incurring from selling exports at lower price to sustain their import business, which has led to sale of imported goods at a highly inflated margins to compensate the losses from export.
In addition to the FX, the new NBE directive should offer the incentives for exporters and importers alike and for remittance from the diaspora to enter into the formal system, “coordinated efforts between the Ministry of Revenue and Customs Commission will be required to stop the illicit flows, create a level playing field and take away the incentive of the unregulated trade that has been persisting for too long,” the chamber suggested.
The statement goes on appreciating Ethiopia’s reformed economic landscape for its groundbreaking shift in creating exporters’ ability to freely use their own foreign exchange for purchasing goods and services within the same legal entity.
The announced reform will favor not only foreign firms engaged in import and export or so, but also “domestic companies involved in export, import substitution, road construction, or agriculture machinery can now obtain supplier credit in foreign currency,” EuroCham stated.
Expecting the real impact of the FX regulatory reforms to be felt in the upcoming months, EuroCham recommends that which leads to fruition of the reform measures. “Successful reforms will however only succeed if the relevant government stakeholders such as customs, tax authorities, trade regulators, security forces and NBE jointly crack down on illicit actors whereby the rule of law and peace and security shall prevail and anti-inflation measures are rapidly implemented.”