NBE continues monetary policy changes

National Bank of Ethiopia (NBE) is continuing its monetary policy changes and this time around it has exempted the 30 percent of foreign currency inflows into commercial banks surrender to some sectors.
A week ago, Mamo Mihretu, Senior Advisor at the Office of the Prime Minister hinted that the government will take more tightened measures on the monetary policy to curb illegal acts and sabotages on the economy.
This week, Eyob Tekalegn, State Minister of Finance, who mentioned the latest revision on the government monetary policy, also said that the change will continue.
The latest announcement of NBE indicated that it has rendered the 30 percent surrender that banks are supposed to give for the central bank from foreign direct investment (FDI), diaspora account and other sources.
Initially, NBE introduced the 30 percent surrender in 2017 to help the government’s hard currency demand for different payments including debt service.
On the latest amendment of the ‘foreign exchange surrender requirements of banks directives no. FXD/72/2021’ NBE exempted the surrender of 30 percent of foreign currency secured from FDI and other sources stated above, while the surrender from export, remittance and NGO transfers was to continue and the percentage climbed to 50 percent.
“A bank shall surrender 50 percent of receipts only from export of goods, services, private transfer (remittance), and NGO’s transfer to the NBE every month within the first five working days of the next month,” article 3.1 of the amended directive stated.
The ‘foreign exchange inflow’ definition on the directive article 1.2 said that for the purpose of these directives, refers to foreign exchange received from export of goods, services, private transfer (remittance), and NGO’s transfer.
One of the IBD director elaborates the idea of the directive as that it is exempted banks to surrender foreign currency except the stated three sources.
He told Capital that the latest decision may help to enhance FDI and the investors who are engaging to access more foreign currency from their foreign source to bring and use it for their operation in the country. He reminded that the FDI at least should come with USD 200,000 in cash or in kind, while they expected their 30 percent to surrender to the central bank through their correspondent bank, “but now they may use it fully.”
The IBD head added that the diaspora will also be encouraged to come up with the foreign currency which will directly help the country and banks to have more foreign currency meanwhile the volume that comes from the diaspora account is very minimal and have restriction to import only prioritizes commodities as per the directive issued in March this year.
Besides the FDI and diaspora account, banks may have sources like purchase of cash and foreign currency saving as a source of foreign currency that will not be included under surrender as per the new directive.
The other amendment that NBE did this week is that foreign currency generators are allowed to use their 40 percent of the hard currency.
The ‘the retention and utilization of export earnings and inward remittances directives no. FXD/73/2021’ that amended FXD/70/2021 stated that banks are required to surrender 50 percent of the foreign currency earnings from the state three sources for NBE.
Article 4.2 of directives no. FXD/73/2021’ added that exporters of goods and services and recipients of inward remittance shall have the right to retain 40 percent of their export earnings in foreign currency indeterminately in a retention account after deduction of 50 percent surrender requirement for the total earnings, “whereas the remaining 10 percent shall be surrendered to the respective bank at the prevailing buying exchange rate immediately on the day of the receipt while the bank shall effect the payment of the equivalent birr to an eligible customer.”
Under the directive FXD/70/2021 that was issued on March, exporters of goods and services and recipients of inward remittance shall have the right to retain 31.5 percent of the total, while NBE will take the 30 percent and the balance for the commercial bank. However, in the latest directive reduced the share of banks to 10 percent on the stated foreign currency earnings sources from the previous 38.5 percent.

Similarly, on the week NBE has issued ‘investment on DBE Bonds directive no. SBB/81/2021’ that enforce banks to invest a minimum of 1 percent of their outstanding loan and advance in Development Bank of Ethiopia (DBE) Bond until the aggregated bond holding equaling 10 percent of their total outstanding loans and advances.
The DBE Bond shall have a maturity period of three years and shall pay a bond rate at least 2 percentage points higher than the minimum interest rate paid on saving deposit at the time of issuance. Currently, the minimum saving rate is 7 percent.
NBE has also announced that insurers to invest 15 percent of their net revenue on DBE Bond.
The reserve ratio of banks has also doubled from 5 percent to 10 percent and the lending facility rate has increased to 16 percent from 13 percent of the past.

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