Authored By: MAHLET ZERIHUN BELAYNEH
Mekdes and Associates law offices
Introduction
Foreign exchange regulation has long been central to Ethiopia’s macroeconomic governance[1]. Persistent foreign currency shortages, widening trade imbalances and external debt pressures have historically justified a highly centralised regime prioritising reserve preservation over market flexibility[2]. On 11 February 2026, the National Bank of Ethiopia (NBE) adopted Foreign Exchange Amendment Directive No FXD/04/2026 (“Amendment Directive”), modifying Directive No FXD/01/2024.[3]
This article argues that Directive No FXD/04/2026 represents calibrated decentralisation rather than systemic deregulation[4]. While it enhances investor confidence and transactional efficiency, it retains macro-prudential safeguards characteristic of controlled capital account regimes[5].
Legal and Institutional Framework
The NBE derives authority from the National Bank of Ethiopia Establishment Proclamation No 591/2008 (as amended)[6]. Directive No FXD/01/2024 consolidated surrender requirements, centralised approval for external borrowing and strict foreign currency controls[7]. The 2026 Amendment selectively relaxes these controls without dismantling the overarching supervisory framework.
III. Removal of Surrender Requirement for Service Exporters
Directive No FXD/01/2024 required exporters to convert 50% of foreign currency proceeds into Birr immediately upon receipt.[8] The Amendment removes this obligation for service exporters[9].
This reform strengthens liquidity flexibility for sectors such as aviation, ICT and consultancy[10]. However, differentiated treatment may incentivise regulatory arbitrage and could reduce short-term forex supply to the central bank[11].
Expanded Authority of Commercial Banks
A defining feature of the Amendment Directive is the decentralization of approval authority[12].
External Loans and Supplier Credits
Previously, prior approval and registration by the National Bank of Ethiopia (NBE) were mandatory before accessing external loans or supplier credits[13].The Amendment now authorizes commercial banks to review and approve such facilities, subject to compliance with the 60:40 debt-to-equity ratio requirement applicable to foreign-financed investments[14].
This shift reduces administrative delays and strengthens the role of commercial banks in prudential assessment, though the NBE appears to retain ultimate oversight upon remittance of funds.[15]
Bank Guarantees for Private External Loans
Commercial banks were previously prohibited from issuing guarantees for private external loans under the earlier directive framework[16]. The Amendment permits issuance of guarantees up to 10 per cent of a bank’s total capital, subject to compliance with the Single Borrower Limit Directive[17]. This change materially expands private sector access to cross-border finance while embedding prudential safeguards designed to mitigate concentration and credit risk[18].
Dividend and Profit Repatriation
Banks may now approve repatriation of dividends and profits arising from registered foreign investments without prior NBE authorisation.[19] This reform enhances investor confidence and aligns Ethiopia’s foreign exchange administration with international investment protection standards concerning free transfer of funds, provided that initial capital registration with the NBE remains duly effected.[20]
Outward Investment and Controlled Capital Mobility
A notable reform introduced by the Amendment Directive is the formal recognition of outward investment by Ethiopian entities, subject to prior approval of the NBE[21].Whereas earlier policy instruments reflected a restrictive posture toward capital outflows, and the revised framework adopts a conditional permissive model. Although approval remains discretionary, the normative orientation of the regime has shifted. The reform reflects cautious capital account opening while preserving macro-prudential safeguards. The allowance of outbound remittances of up to USD 3,000 for family support further illustrates this incremental approach to liberalization[22].
Forward Exchange Contracts and Risk Management
The Amendment authorizes commercial banks to enter forward foreign exchange contracts without prior NBE approval[23]. Forward arrangements enable hedging against currency volatility and enhance predictability in trade and investment transactions. This reform introduces limited derivative functionality within Ethiopia’s otherwise tightly regulated financial environment.
VII. Critical Assessment
The Amendment Directive embodies selective liberalization rather than systemic deregulation. Three themes emerge.
First, decentralization: operational decision-making authority shifts from the NBE to licensed commercial banks.
Second, sector-specific flexibility: service exporters and financial institutions benefit from targeted regulatory relief.
Third, supervised capital mobility: outward investment, guarantees and derivative instruments remain subject to prudential ceilings and supervisory oversight.
Accordingly, the reforms preserve macroeconomic stability objectives while improving transactional efficiency. Their effectiveness will ultimately depend on banking sector capacity and the consistency of supervisory enforcement.
VIII. Conclusion
Directive No. FXD/04/2026 marks a significant stage in Ethiopia’s evolving financial governance. It does not dismantle regulatory oversight but reconfigures it. By empowering commercial banks and expanding foreign exchange flexibility within a controlled framework, the NBE has initiated a structured transition toward moderated liberalization. If effectively administered, the reforms may enhance investor confidence, improve foreign exchange allocation efficiency, and support Ethiopia’s gradual integration into the global financial system.
Bibliography
Primary Sources
- Legislation and Directives
- Investment Proclamation No 1180/2020
- National Bank of Ethiopia Establishment Proclamation No 591/2008 (as amended)
- National Bank of Ethiopia, Foreign Exchange Amendment Directive No FXD/04/2026 (11 February 2026)
- National Bank of Ethiopia, Foreign Exchange Directive No FXD/01/2024
- National Bank of Ethiopia, Single Borrower Limit Directive (current consolidated version)
Secondary Sources
- Basel Committee on Banking Supervision, Basel III: Finalizing Post-Crisis Reforms (Bank for International Settlements 2017)
- International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions (latest edn)
- International Monetary Fund, Article IV Consultation Report: Federal Democratic Republic of Ethiopia (latest available year)
- International Monetary Fund, Institutional View on the Liberalization and Management of Capital Flows (2012, updated 2022)
- World Bank, Ethiopia Economic Update (latest edn)
[1]National Bank of Ethiopia Establishment Proclamation No. 591/2008 (as amended); Constitution of the Federal Democratic Republic of Ethiopia, Art. 95 (monetary and financial powers of the federal government).
[2] International Monetary Fund (IMF), Article IV Consultation Reports: Federal Democratic Republic of Ethiopia (various years); World Bank, Ethiopia Economic Update (recent editions addressing FX shortages and balance-of-payments pressures).
[3] National Bank of Ethiopia, Foreign Exchange Amendment Directive No. FXD/04/2026 (11 February 2026); amending Directive No. FXD/01/2024.
[4] See generally IMF, Institutional View on the Liberalization and Management of Capital Flows (2012, updated 2022) (distinguishing calibrated liberalisation from full capital account deregulation).
[5] IMF, Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) (latest edition) (categorising managed exchange and capital control regimes); National Bank of Ethiopia foreign exchange regulatory framework.
[6]National Bank of Ethiopia Establishment Proclamation No. 591/2008 (as amended), Arts. 4, 5, 6 (mandate and powers of the NBE).
[7] National Bank of Ethiopia, Foreign Exchange Directive No. FXD/01/2024 (provisions on surrender requirements and approval of external loans).
[8]Directive No. FXD/01/2024, provision on export proceeds surrender requirement (50% mandatory conversion rule).
[9]Directive No. FXD/04/2026, amending provision removing surrender obligation for service exporters
[10] See IMF, Balance of Payments and International Investment Position Manual (BPM6) (treatment of service export earnings).
[11] IMF, Institutional View on Capital Flows (updated 2022) (risks of partial liberalisation and regulatory arbitrage).
[12] National Bank of Ethiopia, Foreign Exchange Amendment Directive No. FXD/04/2026 (11 February 2026), general provisions decentralizing approval authority.
[13] National Bank of Ethiopia, Foreign Exchange Directive No. FXD/01/2024, provisions requiring prior NBE approval and registration of external loans and supplier credits.
[14] National Bank of Ethiopia, Directive No. FXD/04/2026, amending provision authorising commercial bank approval of external loans; read together with Investment Proclamation No. 1180/2020
[15] National Bank of Ethiopia Establishment Proclamation No. 591/2008 (as amended), Arts. 4–6
[16] Directive No. FXD/01/2024, prohibition on issuance of guarantees for private external loans
[17] Directive No. FXD/04/2026, provision permitting bank guarantees within 10% capital threshold; National Bank of Ethiopia, Single Borrower Limit Directive (current consolidated version).
[18] Basel Committee on Banking Supervision, Base III
[19] Directive No. FXD/04/2026, amending provision on dividend and profit repatriation approval by authorised banks
[20] Investment Proclamation No. 1180/2020, provisions guaranteeing remittance of profits and dividends of registered foreign investments; see also IMF, Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) (latest edition).
[21] National Bank of Ethiopia, Single Borrower Limit Directive (as applicable).
[22] Foreign Exchange Amendment Directive No FXD/04/2026
[23] ibid.
