Foreign Currency Regulation As A Risk To Foreign Direct Investment In Ethiopia

Abstract

Ethiopia has recently become one of the prime destination and largest host of FDI among East African countries. The government has made considerable efforts to improve the business and investment climate through amendment of laws and policy frameworks. However, there are a number of risks to foreign investors to invest here in Ethiopia, including; trade regulation, perceived foreign exchange rate risks, restrictions on foreign currency transaction and conversion, inconsistency and inefficiency in the tax administration and insufficient local access to finance etc. In Ethiopia forex related issues like currency convertibility, regime and exchange rate are mainly governed by a number of laws including; FDRE Constitution, Proclamations, Regulations, and Directives. Ethiopia currently practices a managed floating exchange regime and the National Bank of Ethiopia (NBE) is mandated with maintaining exchange rate stability in the market. A comprehensive legal framework backed by strong institutions efficiently enforces exchange policies and make business of foreign currency legally certain, predictable, transparent and thereby attract FDI. However, if the foreign currency laws of a country are not investor friendly and the law enforcement organs are inefficient, it becomes a challenge for foreign investors to invest, reinvest and be competitive at international market. Against this background, the study has the objective of assessing the Ethiopian’s foreign currency regulation as a regulatory risk to FDI in Ethiopia. By using the mixture of doctrinal research, non-doctrinal and comparative methods the thesis sought to answer the major questions of how foreign currency regulations constitute a regulatory risk to existing and potential foreign direct investment in Ethiopia and how its legal and institutional frameworks aspects specifically constitute a risk to foreign direct investment in Ethiopia. The findings of the study reveal that; strict control of the currency convertibility and transactions, unreliability/acute shortage of foreign currency supply in Ethiopia’s banks hampers the ability of foreign direct investors to import raw materials and semi-finished goods, restricts repatriation of profits, despite laws allowing foreign company earnings repatriations. Besides, legal regime that govern foreign currency exchange issues in Ethiopia are mostly characterized by numerous unstable, unpredictable, uncertain directives arbitrarily enacted by National Bank of Ethiopia thereby constituting as a major risk for the existing and potential FDI inflow to Ethiopia. Hence, the government should review and lift the strict regulation/control/ of foreign currency allocation, surrendering requirements and restriction on transactions and currency convertibility through liberalizing foreign currency exchange regimes. enacting separate exchange rate policy and comprehensive Laws regulating foreign currency exchange. Finally, The Federal Government alongside with its respective organ should focus on maintaining monetary stability and economic growth wich are key to attract FDI flows, resolve the prevailing severe foreign exchange shortages and delays in hard currency payments by relevant organs for goods and services that can be delayed by months/years