The Impact of Profit Repatriation Controls on Foreign Direct Investment (FDI)

In the developing and frontier markets the real impediment to long term investment isn't entry regulation. It’s capital repatriation. You need to be absolutely certain that when your business makes a profit you can get that money back in hard currency and send the dividends home without it being a multi-year ordeal.
When a foreign company invests in a market it brings in hard currency (USD, EUR etc.) but it operates and sells in local currency. If a country is in a state of severe foreign exchange (FX) shortage then those local currency profits are effectively trapped. When capital is locked up like that investors simply stop building any long term local operations and go in for the short term, low risk trade deals.

Ethiopia’s recent National Bank of Ethiopia (NBE) foreign exchange directives introduced some much-needed structural changes which help build real confidence among foreign investors.

The provision under sub article 16.3.1 of the directive FXD/01/2024 (as amended by FXD/04/2026) entitles Commercial Banks to process and approve profit and dividend remittances from registered FDI entities. Investors no longer have to wait for the manual, central bank level approvals to simply remit their dividends. Authorized commercial banks can now process and approve the remittance of profits directly for registered FDI entities thereby eliminating the huge amount of admin delay. Investors can open foreign currency accounts as per the provisions under articles 10 and 16 of the directive FXD/69/2021. Local commercial banks may open foreign exchange retention accounts for these foreign companies immediately upon entity registration. That enables them to move funds and get going much more quickly.

The impact of these regulatory frameworks is visible on the ground. In a recent Parliamentary session with NBE Governor Eyob Tekalegn, he noted that these reforms have overcome historical challenges, noting that while foreign investors previously faced severe challenges repatriating their capital and profits due to restrictive measures, things have transformed entirely. Recalling a recent meeting with the American Chamber of Commerce in Ethiopia, he stated that when he asked if any member companies were currently facing repatriation issues, "none reported any challenges." With the Central Bank and the banks no longer seeing repatriation as an issue, this has helped to give investors more confidence in the financial system.

Regardless, since it can take a long time to balance foreign exchange liquidity on a national scale, the Ethiopian Investment Commission offers foreign investors some guarantees of repatriation through the creation of Special Economic Zones (SEZs). It creates a ring fenced environment in which the normal policy impediments don't apply. Companies operating in the designated SEZs can retain 100% of the FX generated from their exports. This enables them to service their foreign debt and pay out dividends to shareholders without being held up by the local currency. Foreign investment will always seek to make the most of their profit by ensuring that they can easily repatriate it. Ethiopia has shown that by implementing recent reforms and providing incentives within SEZs, the capital will flow in easily with having an open door on getting out of the market.