Gov’t Mulls Transitional Period For Manufacturers Affected By Currency Float

Officials at the ministries of Industry and Finance, as well as central bank regulators, are mulling over ‘transitional period interventions’ in a bid to ease the burdens weighing on manufacturing industries following the liberalization of the forex market.

The intervention proposal expected to be tabled to the national steering committee for the manufacturing sector aims at aligning the prices on industrial inputs ordered prior to the decision to float the exchange rate and the subsequent depreciation.

Officials are planning to provide a grace period for manufacturing industries who placed orders for input imports prior to the floating.

“The government and stakeholders in the manufacturing sector have decided that certain economic activities exposed to the floating reform deserve a transitional period treatment. These areas are specific to the manufacturing sector. We are preparing to table these considerations to the macro-economic team for approval. The detailed cases that need the transitional period will be disclosed once decided,” said Tilahun Abay, an advisor to the Ministry of Industry.

The team behind the proposal has identified areas to be considered for special treatment under the transitional period, including options for supply credit, according to officials.

– Advertisement –

Manufacturing industries that had placed orders for imports under supply credit or franco valuta will be obliged to sell their products at the same rates they offered prior to the reform. However, these industries will be expected to repay their debts at the current exchange rates of over 100 birr per US dollar.

Manufacturers worry about the burden from the heightened debt service charges associated with the disparity.

“Some cases related to the forex transactions that need realignment before and after the day of floating need a window for transition so that the industries will not become victims of the exchange rate difference,” said Tilahun.

The final decision will rest with the national steering committee on manufacturing industries, which is led by Girma Birru, who is also a member of the macroeconomic committee under the Office of the Prime Minister.

The steering committee was formed last year following directions from the PM.

“But before tabling the case for the endorsement of the macro team, we are discussing the issues with the major stakeholders like the NBE, Ministry of Finance, Customs Commission, and others. We are working on the details of the cases to be tabled,” said Tilahun. “For instance, when the government suspended 38 items from import, a brief exemption time period was granted for LC processes that had already started before the suspension and whose imports were already in the process. A similar intervention and grace period is required for manufacturing imports that were in process when the floating was declared.”

A letter from the Finance Ministry and Customs Commission instructs that imports that were already underway before the decision to float the currency should be priced based on the rates before the floating.

However, the government has decided the duties for these imports are to be calculated based on the prevailing daily exchange rates.

Tilahun foresees the decision will lead to manufacturers incurring heavy costs, and calls for the need for special intervention to minimize the impact.