Thursday, February 22, 2024

Industrial sector to benefit from revised foreign currency retention directive

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By Muluken Yewondwossen

The Ministry of Industry (MoI) has announced that recent changes to the retention directive will facilitate access to foreign currency for the industrial sector. The National Bank of Ethiopia (NBE), the country’s central bank, revised the foreign exchange surrender law in August of the prior year with the aim of promoting the effective utilization of hard currency by exporters.

Previously, banks were required to surrender 70 percent of their foreign exchange earnings to the NBE under the surrender law. However, this directive has been amended. Under the previous directive, exporters of goods and services, as well as recipients of inward remittances, were allowed to retain 20 percent of their export earnings in foreign currency indefinitely in a retention account. This was after deducting the compulsory 70 percent surrender and remitting the remaining percentage to the respective bank.

In August, the NBE revised the percentage, enabling exporters of products and services to retain 40 percent of their foreign exchange earnings. Local manufacturers have often expressed concerns about the insufficient availability of foreign currency, despite their ability to generate hard currency.

Melaku Alebel, the Minister of MoI, presented his six-month report to the Industry and Mining Standing Committee, stating that since the revision of the foreign currency retention directive, there has been an increase in the availability of hard currency. This availability is crucial for importing capital goods, components, and inputs. According to the minister, the manufacturing sector was projected to receive USD 338 million during the first half of the budget year. However, the actual supply amounted to USD 274 million, which also included funds for the import of new machinery. Melaku acknowledged that there are still limitations on the amount of hard currency that can be allocated for the import of inputs and spare parts, which affects the current operations of the industry.

To address the challenges faced by the industry sector, the Minister suggested considering additional options such as supplier credit and franco valuta schemes. Although specific figures were not provided, the Minister acknowledged that there has been improvement compared to the previous year’s performance due to the revision of the foreign currency surrender directive.

Regarding financing availability, heavy industries have been granted 23.7 billion birr in credit, an increase of 883 million birr compared to the same period in the previous year. However, the original plan was for 30 billion birr. As part of the Home Grown Economic Reform (HGER) II plan, the industry sector is expected to receive 24 percent of the overall loan provision, up from the previous position of 12 percent.

In terms of loan distribution, the manufacturing sector currently receives 13.8 percent of all loans. The Minister emphasized the need for improvement in this area and stated that discussions have been held with banks and other relevant bodies to address this issue. The manufacturing industry plays a crucial role in import substitution efforts, with a market share of 39.7 percent, which has increased by more than one percent compared to the end of the previous budget year. Import substitution efforts have reached nearly one billion dollars, achieving 90 percent of the target. The goal is for locally manufactured goods to capture 60 percent of the market share by the end of the ten-year growth plan.

The sector faces challenges such as internal conflicts, issues in the Red Sea region, and difficulties with Djibouti Customs. These factors have contributed to the obstacles encountered in improving the industry sector.

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