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Understanding Directive No. FXD/82/2022: A Guide to External Borrowing in Ethiopia

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Understanding Directive No. FXD/82/2022: A Guide to External Borrowing in Ethiopia

Directive No. FXD/82/2022 is issued by the National Bank of Ethiopia (NBE) to regulate external borrowing by Ethiopian entities. According to the bank’s press release this directive aims to ensure sustainable debt management, enhance foreign exchange availability, and promote economic growth by facilitating external financing for strategic sectors.

Introduction

Directive No. FXD/82/2022 establishes a framework for accessing external loans by Ethiopian businesses. It outlines the requirements and processes for borrowing from foreign lenders, focusing on key economic sectors. By doing so, it aims to support national development goals and strengthen economic stability.

General Part

The directive provides the overarching principles guiding external borrowing. It emphasizes prudent debt management, prioritizing sectors that contribute significantly to economic development. Directive No. FXD/86/2023 sets out the eligibility criteria for borrowers, the approval process for loans, and the terms and conditions governing such financial arrangements. Directive FXD/82/2022 shall apply to mattresses that are not governed by the provisions of Directive 82/2022.

Directive No. FXD/82/2022
Directive No. FXD/82/2022

Eligible Borrowers and Requirements

A. Exporters

Exporters engaged in goods and services that earn foreign exchange are eligible for external loans. Requirements include:

  • Demonstrated capacity to generate foreign exchange earnings.
  • Compliance with export regulations and standards.
  • A clear plan for loan utilization to enhance export capacity.

B. Foreign Investors

Foreign investors operating in Ethiopia can access external loans under the following conditions:

  • Investment in priority sectors identified by the government.
  • Compliance with investment laws and regulations.
  • A commitment to contributing to local economic development.

C. Manufacturing Sector

Manufacturing enterprises can borrow externally to support industrial growth. Requirements include:

  • Alignment with national industrialization goals.
  • Utilization of funds for capital investment, technology transfer, and capacity building.
  • Adherence to environmental and labor regulations.

D. Agricultural Machines/Input Exports and LPG Gas Import

Entities involved in the export of agricultural machinery/inputs and the import of LPG gas are eligible for external borrowing. Conditions include:

  • Contribution to agricultural modernization and energy security.
  • Compliance with sector-specific regulations.
  • A detailed plan for the use of funds to improve sectoral efficiency.

Approval Registration and External Loan

Directive No. FXD/82/2022 mandates a formal approval and registration process for external loans with the NBE. This involves:

  • Submission of loan agreements and related documentation.
  • Evaluation of the economic impact and feasibility of the loan.
  • Registration of approved loans in the NBE’s database for monitoring purposes.

All-In Cost Ceiling

The directive sets an all-in cost ceiling for external loans to prevent excessive borrowing costs. This includes:

  • Interest rates, fees, and other charges associated with the loan.
  • A cap on the total cost of borrowing, aligned with international benchmarks.
  • Regular review and adjustment of the ceiling based on market conditions.

Guarantee and Repayment of External Loan

Borrowers must provide adequate guarantees to secure external loans. The directive stipulates:

  • Acceptable forms of collateral and guarantees.
  • Mechanisms for loan repayment, including foreign exchange sourcing.
  • Measures to ensure timely and full repayment of borrowed funds.

Conclusion and Recommendation

Directive No. FXD/82/2022 plays its role in facilitating external financing for Ethiopia’s economic development. It provides a structured approach to borrowing, ensuring that funds are channeled into strategic sectors. However, continuous monitoring and evaluation are recommended to address emerging challenges and optimize the directive’s impact on the economy.

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FA LO