Forex available for loan to foreign investors as local businesses cry foul

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The National Bank of Ethiopia (NBE) issued another controversial directive that would allow foreign investors to access foreign currency on credit for importing capital goods, again frustrating local investors. The ‘Directive for Regulation of External Loan in Kind No. FXD /61/2019, which was issued last week and signed by Tebebe Hailegiorgis, Deputy Director of Foreign Exchange Monitoring and Reserve Management Directorate of NBE, and allowed foreign investors even though they are not exporters to access a long term foreign currency loan to import capital goods.
However the directive has given the green light for exporters regardless of, if they are local or foreign to access similar extraordinary incentives for their business here.
In the past foreign investors were expected to move capital here and use that for their investment, while the current directive has given them the means to access capital locally, according to experts closely following investment.
The directive has been strongly criticized by local investors who claim it goes against the country’s investment law and continues discriminating them.
Finance sector experts say the directive is another pressure for the country’s foreign debt arena. “Currently the country is paying the foreign debt for the unfinished projects like sugar factories and others, while this and the previous directive that is the supplier’s credit directive issued in September 2017 places the country in a further debt burden,” they argued. “On the supplier’s credit scheme the government gives a guarantee for foreign investors to import raw materials and when the current law is added it supports them in importing capital goods with a payment from a public source,” they added.
“In short the central bank said it is responsible for foreign companies’ activities and put itself for the commitment of payment via commercial banks of the country. It is also another burden for the country in its limited hard currency reserves or earnings,” they told Capital.
“If the foreign investors are engaged in export businesses even partly it would be ok but the directive gives a right for all foreign investors to access the capital goods loan even they are not contributing to the hard currency earnings,” they finance sector expert explained.
On the other hand local investors that Capital interviewed said that they were expecting a solution from the supplier’s credit directive, but NBE has added another discriminating rule at their cost. “These directives are issued without balance for local investors, who are also engaged in the same investment that foreign investors are engaged,” said the local investors.
The external loan in kind directive article 4 sub article 4.1 stated that an exporter is eligible to acquire capital goods through an external loan in kind arrangement; provided that the capital good is going to be utilized in an export oriented investment that generates foreign currency. This sub article added local investors but exporters allowed accessing the external loan in kind.
The directive sub article 4.2 also stated that a foreign investor is also eligible to use the external loan in kind arrangement to acquire capital goods when it fulfills all requirements for article 4.2.3 of this directive. Article 4.2.3 lists the requirements: an application letter, valid investment or business license, foreign capital registration certificate, the draft loan agreement with detailed terms showing the type of agreement, interest rates and applicable charges, repayment method and schedule, borrower-lender relationship, purpose of the loan and others that NBE may be deemed.
Article 4.2.2 indicated that the debt to equity ratio may not exceed 60:40 of the foreign capital. The directive stated that the NBE shall issue approval letter for external loan in kind if all the requirements are fulfilled.
Bankers and finance experts that Capital spoke stated that the directive puts more pressure like the supplier’s credit directive, on the local private sectors to be competitive in the market and creates big challenges in the settlement of their credit at banks, but the view of Dereje Zebene, President of Zemen Bank, is more than that.
He expressed that the directive would not have any clear price indication for the capital goods. The definition of the directive for ‘capital goods’ only stated as ‘any equipment or machine that may be used to produce products or to provide services and includes accessories. “The definition did not mention about the price of the goods or accessories. This makes the directive vague and easy to be abused by investors, who may under or over invoice to import goods,” Dereje said.
He added that it is not clear if machines have to be new or used. “It requires a clear arrangement regarding to these two points otherwise the directive shall be misused by illegal actors and put the country in a burden,” the banker told Capital.
Some of the investors may import refurbished equipment or accessories previously used in other places but call them new, so this must be reevaluated, according to Dereje “and the central bank should have specific price rate for every good.”
However he stated that the directive may improve investment but would affect locally based investors.
The all in cost ceilings for external loans shall be on within three different maturity periods and six month LIBOR (London Interbank Offered Rate) or equivalent EURIBOR (Euro Interbank Offer Rate) plus 2, 3 or 5 percent interest rates based on the period that are up to 3 years, from 3 to five years and more than five years.
LIBOR and EURIBOR are benchmark interest rates at which major global banks lend to one another in the international interbank market for loans.
Some government officials like Fetlework Gebregziabher, Minister of Trade and Industry, criticized the supplier’s credit directive saying that it should include local investors.