By Mahlet Mesganaw, Partner at DMLF
The National Bank of Ethiopia (NBE) issued a Directive that is cited as “The Foreign Exchange Directive No. FXD/01/2024”(hereafter the Directive). The aim of the Directive is to create a more ‘open and competitive foreign exchange market that can attract substantial foreign exchange inflows, ensure efficient resource allocation, and foster greater transparency in foreign exchange transaction activity’. The Directive repealed all previous foreign exchange directives and circulars issued by the NBE and replaced by this Directive. The effective date of this Directive is as of July 29, 2024. Here below we shall briefly see the definitions of forex bureaus, operation and transaction, formation and security requirements for bank-affiliated forex bureaus and independent forex bureaus, with a brief conclusion at the end.
Definitions
The Directive defines ‘foreign exchange market’ and ‘forex bureau’ as follows:
“Foreign exchange market” means a market where spot foreign exchange transactions are conducted at either the retail level (between bank and client or between forex bureau and client) or wholesale level (among banks). “Forex Bureau” means a window of an authorized bank where the purchase and sale of foreign currency cash notes from and to the public is conducted, or an independent (non-bank) company authorized by NBE to conduct specific foreign exchange transactions similar to that of a banks’ forex bureau.
Operation
Foreign exchange bureaus may operate either as a specialized window of banks or as independent (non-bank) foreign exchange bureau. Bank-based foreign exchange bureaus shall undertake foreign exchange transactions subject to a number of requirements that will be discussed here below. Similarly, independent (non-bank) foreign exchange bureaus shall undertake foreign exchange transactions subject to a number of requirements to be discussed here below.
Transactions
A forex bureau shall engage in the buying and selling of major convertible currencies on the basis of freely negotiated rates with its customers. A forex bureau shall engage in spot transactions only, with immediate delivery of currencies bought or sold. All forex bureau are required to sell and/or buy cash notes at displayed exchange rates before any subsequent change. All foreign exchange buying and selling transactions by a forex bureau shall be done using forms authorized by the NBE. All forex bureau shall exercise every care to check the authenticity of currencies they buy and use counterfeit detecting machines when exchanging foreign currency cash notes. Hence, a forex bureau shall display in a prominent manner:- a). its buying and selling rates for cash notes; b). business hours, a forex bureau can establish its service hours based on the customer requirements and appropriateness to the business; c) post a notice to the effect that all customers are entitled to get a receipt for all transactions to proof the legality of exchange.
Formation Requirements
Bank-affilated forex bureau are formed with the necessary security requirements. However Independent foreign exchange bureau have a number of requirements, in addition to that of the security and related requirements set for bank-affiliated forex bureau. Independent Forex Bureau License will be issued if the bureau is a) an established business entity, set up in whatever legal form; b) that is owned by an Ethiopian national, Non-Resident Ethiopian, and/or Foreign Citizen of Ethiopian Origin; c) Fulfills the minimum capital requirement of Birr 15 million d) provide a Security Deposit of Birr 30 million to be placed in a blocked account (which can be interest-earning) at any bank; e) Ensure that sufficient insurance is procured to fully cover the maximum cash holdings that will be at the forex bureau site at any given time. Independent Foreign Exchange Bureau are to engage solely in the business of buying and selling foreign exchange cash notes and are not to engage in any other area of banking activity.
Security Requirements
Security requirements for forex bureaus include a) suitable premise in all respects to carry on the business of a forex bureau and that meets safety and security standards set out by the Authorized bank; b)Name plate indicating the physical address of the forex bureau; c) Necessary device/equipment to detect counterfeit notes d) Provide list of names and designations of the forex bureau staff; and e)Ensure that the staffs of the forex bureau are people of integrity, credibility and competence, with no record of fraud, dishonesty, and corruption; f) situated in a separate and secure place of business but accessible to customers. g) located outside the premises of the Authorized Bank must have: i. a security arrangement strong enough to properly protect its premise, staff and property; ii. use of CCTV camera monitoring systems; iii. fire extinguishers installed at vantage points within the premises; iv. A fireproof safe/vault under the control of more than one person. v. The duplicate keys should be stored off the premises.
To sum up Ethiopia has liberalized the foreign currency exchange market to be determined by market based exchange rates. Operators in selling and buying hard currency are bank affiliated forex bureaus and independent forex bureaus. The Directive attached strict security requirements for licensing such forex offices. The business sector of forex bureaus is reserved for Ethiopian nationals and diasporas who hold identification card known as yellow card. This may last till the liberalization of the banking sector, which then may open such forex bureaus open for operations to licensed foreign banks or as the case may be for all foreigners.
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By DMLF
Federal Supreme Court Cassation Division on File No 219386, made a binding decision stating that the Employer is obliged to install a performance evaluation mechanism to say the capacity of the employee to perform deteriorated and hence terminate the employment contract.
The employer needs to have a mechanism of evaluation of employees’ work performance. Such a work evaluation mechanism has to be clear and participatory. When evaluating the work performance of the employee, and such an employee exhibited deteriorating work performance, the employer should show that the determination comes after such evaluation. Termination of employment based on performance without a set of mechanisms in place for such evaluation by the employer, shall make the termination of employment unlawful.
Article 28(1)(a) states as follows: . 1/ The following grounds relating to the loss of capacity of, and situations affecting, the worker shall constitute good cause for terminating a contract of employment with prior notice: a) The worker’s manifest loss of capacity to perform the work to which he has been assigned; or his lack of skill to continue his work as a result of his refusal or inability to make use of an opportunity of training arranged by the employer to upgrade his skill or after having been trained, his inability to acquire the necessary skill,(emphasis added to show the Amharic version uses ‘or’ whereas the English translation ‘and’).
Therefore, Cassation court on the above decision puts an obligation on the employer to show to the court, at the time of litigation, that when the employer is evaluating the performance of the worker, the employer needs to have an open, participatory and clear evaluation format to determine the worker manifests loss of capacity and such loss of capacity is determined by implementing such performance evaluation mechanism.
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Source Daniel Fekadu( lawyer and consultant at-law) compilation of Cassation Decisions August 2015(August 2023) Page 92
By Dagnachew Tesfaye, Managing Partner at DMLF
The National Bank of Ethiopia enacted a directive namely ‘’The Foreign Exchange Directive No. FXD/01/2024” effective as of July 29/2024. The Directive allows foreign direct investment companies, international organizations, Embassies and foreign Charitable Organizations to open, operate both foreign currency account as well as birr account and additional types of accounts may be permitted from time to time. Not only for the above entities but also for members and employees under these entities, opening, operating of foreign currency accounts are allowed. Authorized Banks may open and maintain Non-Resident Foreign Currency Accounts in the name of the above entities and their employees.
As a result, all funds credited to these Non-Resident Foreign Currency Accounts may be transferred without the necessity of obtaining National Bank’s Permit or approval. Foreign Currency Accounts can be maintained at more than one bank. However, overdrawing of transferable accounts is prohibited. Foreign currency accounts can be opened in any tradable currencies acceptable by NBE.
Foreign Companies (FDI) need to present an application letter, foreign investment license, TIN Certificate, NBE approval letter and other requirements as requested by the opening bank. International Organizations, Embassies and foreign charitable organizations have to present an application letter , supporting letter from pertinent authority, other requirements requested by other relevant laws and the opening bank. For members or employees of the foreign entities, the documents needed are an application letter to open a Foreign Currency or Birr account in the name of persons employed or working under the entity and supporting letter issued by the appropriate organization certifying that the applicant is an official member of the organization with a passport or its equivalent.
Non-Resident Foreign currency accounts can be credited with the following items a. Foreign exchange incoming from abroad; b. Payments from residents of Ethiopia effected under specific authorization of National Bank; and c. Payments from other Non-Resident foreign currency Accounts.
As stated at the beginning, Foreign Entities qualified to open foreign currency accounts are also permitted to open Birr accounts at any bank of their choice. Holders of foreign currency Accounts for Foreign Companies, International Organizations, Embassies and Foreign NGOs may use the account for all foreign payments without any restriction.
Treatment of existing Non-Resident Transferable Birr Accounts (NR-T Birr Accounts) and Non-Resident Non-transferable Birr Accounts (NR-NT Birr Accounts) shall no longer be offered by banks following the enactment of this Directive. Existing NR-T Birr Accounts and NR-NT Birr Accounts already in place as of the effective date of this Directive shall be guided by the previous utilization rules applicable on such accounts. Existing NR-T and NR-NT Accounts shall no longer be credited with new inflows following the date of this Directive and shall be closed upon the full usage of any balances.
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By Mahlet Mesganaw, Partner at DMLF
The National Bank of Ethiopia introduced “The Foreign Exchange Directive No. FXD/01/2024” effective as of July 29,2024 also known as the Green Forex Directive (hereafter the Directive). This Directive repealed and replaced all foreign exchange directives and circulars previously issued by the National Bank of Ethiopia(NBE).
The main objective of the Directive is stated on its preamble and it aims to create ‘’a more open and competitive foreign exchange market that can attract substantial foreign exchange inflows, ensure efficient resource allocation, and foster greater transparency in foreign exchange transaction activity’’. This is good news for foreign investors that have already invested in the country and are struggling to remit proceeds of their investment due to lack of foreign exchange in banks. The Directive provides clear and simple foreign exchange remittance procedures for foreign investors. This will attract foreign direct investment. This article will deal with the definition of foreign investor, remittance of registered foreign investment, required documents for remittance of profits and dividends, backlog treatment for the existing foreign currency requests,documents required for remittance of proceeds from liquidation and sale of shares, and fund transfer for failed investment operations. A brief conclusion shall follow at the end.
Foreign Investor
Foreign investor is defined under the Investment Proclamation No 1180/2020 and this Directive imported a similar definition. Foreign investor means a foreigner or an enterprise wholly owned by foreign nationals, having invested foreign capital in Ethiopia or a foreigner or an Ethiopian incorporated enterprise owned by foreign nationals jointly investing with domestic investors, and includes an Ethiopian permanently residing abroad and preferring treatment as a foreign investor.
Remittance of Registered Foreign Investments
Article 16.2 of the Directive allows foreign investments which are registered by the National Bank or Ethiopia, Investment Commission and other pertinent Government Organ to repatriate the following upon National Bank’s approval:- a. Profit and Dividends accruing from investment; b. Proceeds from the sale of liquidation of an enterprise and c. Proceeds from the transfer of shares or ownership of an enterprise. d. Return back of investment if unable to start operation e. Profits from portfolio investment in equity securities or debt securities
Required Documents for Remittance of Profits and Dividends
According to Article 16.3 of the Directive foreign investors who earn profits or dividends from recognized and registered foreign investments are entitled to remit net profit/dividend abroad on condition that the following documents are submitted to National Bank; a. Authenticated minutes of the Board of Directors or an equivalent body distributing the profit or declaring dividend duly signed by the chairman or secretary of the Board b. Copy of the usual closing financial documents duly audited by an independent third party auditing institution permitted to operate in Ethiopia. c. Capital registration letter issued by National Bank or Investment Authority; d. Tax receipts evidencing the payment of all taxes due to the government (Business and Dividend tax receipts) e. Memorandum & Article of Association or any other similar document by whatsoever name it may be referred; f. Valid business License; g. Application letter; and h. Any other document of evidence that the NBE may require.
Branch Offices of foreign companies operating in Ethiopia desirous of repatriating foreign exchange shall fulfill the requirements enumerated under (b-h) above.
Backlog Treatment: Special Repayment Schedule Applies
Those dividend repatriations requested and approved by the NBE but for which payment has not been made by banks due to foreign exchange shortage, will be treated in a special manner. As an exceptional treatment for any profit and dividend amounts that may be outstanding as of the issuance of this Directive, the NBE will stipulate a special repayment schedule to be applied to address the backlog of such dividend cases. Article 16.3.4 provides that such a repayment schedule will not apply to any new dividend repatriation requests that are initiated after the issuance of this Directive, which shall—for such new cases—be accepted and settled by banks upon demand.
Remittance of Proceeds from Liquidation: Documents Required
Article 16.3.5 of the Directive states that if an investor ceased operation or closes his/her business, which is recognized and registered by the National Bank or Investment Authority, the following documents will be required to transfer the capital. a. Minutes of the decisions of shareholders/partners, if organized in the form of a legal entity. b. Letter of declaration by the owner, in case of sole proprietorship. c. Liquidation report authenticated by the competent authority court and letter from ministry of trade confirming the revoke/strike out of the license. d. Audited Balance sheet & income statement. e. Foreign Capital registration letter f. Tax clearance from pertinent Government Authority. g. Any other document that may be required by the National Bank.
Sale of Shares of Foreign Investors: Documents Required
Remittance of proceeds from sales of shares foreign investors who transfer his/her share-holdings partially or wholly to the Ethiopian National and/or foreign investor can apply for remittance of sale of shares value. As per Article 16.3.6 of the Directive, the seller has to present the following documents. a. Updated foreign capital registration certificate and document. b. Bank credit advice confirming the receipt of the corresponding value in foreign currency, if sold to a foreigner. c. Sales agreement authenticated by document registration and authentication d. Tax Clearance from pertinent Government Organization.
Fund Transfer for Failed Investment Operations
Foreign investors who have registered their foreign investment but are unable to start operations for whatever reason may make foreign exchange remittance upon presentation of confirmation letter from Ethiopian Investment Commission. However, the fund to be transferred should not exceed the registered capital.
Conclusion
The National Bank of Ethiopia has issued a clear, direct, easily implementable foreign exchange directive that addresses not only the existing foreign exchange problem but also attracts future foreign investors to come and invest in Ethiopia. One of the bottle neck problems for foreign investors has been the inability to remit proceeds from their business. Now, the market determination of the foreign exchange, and specific guarantees by the National Bank to treat capital repatriation for foreign investors is great news and shall bring a great opportunity for Ethiopia.
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