The Ethiopian central bank created new directive demands for commercial banks to allocate not more than 50% of their foreign currency for items not included in the National Bank of Ethiopia’s new priority list. It was official on December 1, 2021 and is expected to increase Ethiopia’s proper allocation of the limited forex resources. This directive aims to reduce the inflation pressure by preventing the shortage of imported goods.
In order to allot foreign currency for businesses, the new directive aims to create transparency by establishing three categories in the priority items list. The first consists of pharmaceuticals, inputs for edible oil plants and petroleum products. The second is inputs for farmers and manufacturers and the third is motor oil and capital goods.
A minimum of 50% of forex resources is also required to be distributed to the priority items. The directive additionally declares that 15% of the forex resources have to be distributed to the first priority item, 45% to the second, and the last 40% to the third. Banks that do not allot half of their forex resources to the priority items have to forgo the remainder to the NBE at the current exchange rate.
Representatives of the manufacturers of edible oil have eagerly received this demand because they require about a billion dollars to use for more than 60% of their production capacity. According to Addise Garkabo, General Manager of the Edible Oil Manufacturing Industries Association, the establishment of multiple refinery plants will resolve the current edible oil shortage since imports of crude oil have been difficult due to the forex crunch.
Importers of non-priority items are obliged to deposit 50% of their forex demand in a blocked account at the time of application. Upon deposit, banks are required to pay the minimum interest rate, currently 7%. Fine adjustments have been made for banks that don’t follow the new directives. It has increased from USD 222 (with the current market price about ETB 10,000) to USD 5,000 for each violation.
The Governor and the Vice Governor for Monetary Cluster of the NBE, after studying cases independently, have the right to give special forex approval for financial institutions, the federal government, regional authorities, and city administrations.