Understanding Ethiopia’s New Regulations on External Loans in Kind: A Guide for Foreign Investors
In recent years, Ethiopia has undergone significant regulatory changes affecting foreign investments, particularly concerning external loans in kind. Understanding Ethiopia’s New Regulations on External Loans are crucial for foreign investors seeking to engage in the Ethiopian market. This legal brief provides an overview of the regulatory framework, highlighting the eligibility criteria, approval and registration processes, cost considerations, guarantees, and repayment terms related to external loans in kind.
1. Eligible Borrowers and Requirements
1.1 Exporters
- Eligibility: Exporters can acquire capital goods through an external loan in kind, provided these goods are used in export-oriented investments generating foreign currency.
- Requirements:
- Application letter
- Valid export license
- Draft loan in kind agreement with detailed terms, including interest rates, charges, repayment method and schedule, and borrower-lender relationship
- Pro forma invoice
- Documentation justifying repayment capacity
- Supporting letter from a relevant government body confirming the use of capital goods for their intended purpose
1.2 Foreign Investors
- Eligibility: Foreign investors can use external loans in kind to acquire capital goods, subject to certain conditions.
- Debt-to-Equity Ratio: Must not exceed 60:40 of the foreign capital.
- Requirements:
- Application letter
- Valid investment or business license
- Foreign capital registration certificate
- Draft loan agreement with detailed terms
- Pro forma invoice
- Supporting letter from a relevant government body
2. Approval and Registration of External Loan in Kind
2.1 Approval Process
- The National Bank of Ethiopia (NBE) issues approval letters for external loans in kind upon fulfillment of specified conditions.
2.2 Registration Requirements
- Documents needed for registration include:
- Application letter
- Customs declaration and relevant shipping documents
- Copy of external loan in kind approval letters
2.3 Price Discrepancies
- If there is a price discrepancy between the approval letters and customs documents, the NBE will register the lower price for the capital goods as the external loan in kind value.
2.4 Lease Agreements
- For external loans in kind acquired through lease agreements, the NBE will support or register the lease agreement with the appropriate government body.
3. All-in-Cost for External Loan in Kind
3.1 Cost Disclosure
- Borrowers must transparently disclose the all-in cost of an external loan in kind when submitting an application to the NBE.
3.2 Cost Calculation
- Costs, such as front-end fees and supervision fees, should be spread over the loan repayment period.
4. Guarantees of External Loan in Kind
4.1 Government and Bank Guarantees
- No government or bank guarantees are issued for private loans in kind.
5. Repayment of External Loan in Kind
5.1 Approval for Repayment of External Loan in Kind
- The NBE approves repayment requests for external loans in kind, provided they meet the specified conditions.
5.2 Required Documentation for Repayment
- Required documents include:
- Application letter
- Copy of external loan in kind registration letter
- Loan repayment schedule showing principal, interest, and other charges as per the approved arrangement
As per the National Bank Press release these recent changes in the regulation of external loans in kind are designed to enhance transparency, accountability, and efficiency in foreign investments in Ethiopia. Thus, Foreign investors are encouraged to closely follow these guidelines to ensure compliance and facilitate smooth investment operations. For further assistance and detailed guidance, consulting with legal experts familiar with Ethiopian investment laws is recommended.
If you have questions, comments or need further assistance and detailed guidance, consulting with legal experts familiar with Ethiopian investment laws don’t hesitate to get in touch with us.
