Forex Regulation vis-à-vis Foreign Direct Investment in Ethiopia: An Appraisal of Previous Regulatory Trends vs. the New Forex Law

Abstract

Ethiopia is a key foreign direct investment (FDI) hub in East Africa, consistently striving to boost the business environment with updated legal and institutional regimes. Yet, over the last three decades, foreign investors have been encountering significant investment risks, such as political, economic, and regulatory risks. Forex regulation was one of the regimes that posed a significant challenge to the establishment and operation of foreign investors. Previously, forex was governed by the NBE Establishment Proclamation No. 591/2008 and other subsequent regulations and directives. The forex regulatory trend was generally inconsistent and/or uncertain. In July 2024, Ethiopia adopted a New Monetary Policy Framework to support economic reforms. To implement the new policy, the National Bank of Ethiopia (NBE) enacted Foreign Exchange Directive No. FXD/01/2024. The Directive is the first comprehensive forex law that revises and repeals all the previous forex laws. It introduced substantial policy changes, such as shifting to a market-based exchange and eliminating various forex-related requirements, such as surrendering requirements. Besides, it mandates consultation with the NBE for foreign loan contracts and sets guidelines for forex account transactions in industry parks and special economic zones. On one hand, the rules in general aim to simplify and liberalize forex transactions, and they do have far-reaching repercussions on FDI in Ethiopia. This article, through textual analysis and/or doctrinal research methods, analyzes Ethiopia's previous forex regulations and compares them with the new law to evaluate their impact on FDI (if the regulatory trend supports or hinders FDI from the perspective of foreign investors). The findings of the work reveal that the previous forex regime was largely inconsistent with the state investment policy of attracting and protecting FDI. Neither did it resolve the country's currency shortage. Thus, it has been causing a substantial regulatory risk to FDI. The new forex law that repeals all the previous forex regime has incorporated significant changes that, on their faces, do potentially create a more favorable condition for the establishment and operation of FDI when compared to the previous regime. Yet, their practical repercussions on FDI in Ethiopia are to be seen.