[#StopTheKillings]: Would foreign banks be beneficial for Ethiopia? (1)

Introduction
In June 2018, Ethiopia’s new prime minister Abiy Ahmed survived an apparent assassination attempt. The attack was not entirely surprising. Mr Ahmedhad been ruffling quite a lot of feathers. He purged the military hierarchy, instituted reforms at businesses owned by the military, and signalled the liberalisation of crucial sectors like banking and telecoms; if not for anything else, to ameliorate a perennial foreign exchange shortage. Fears have been raised about whether allowing foreign banks to participate in the Ethiopian banking sector would be beneficial to the country. Not that there was not already some representation by foreign firms. Some already operate representative offices, for instance. But the goal has always been to be able to operate fully-fledged banks. The Ahmed administration is a potential ray of light in this regard; albeit the government insists opening up the financial sector is not being considered at this time. Years ago, this might be taken with all seriousness. But the Ethiopian government rarely signals its policy drift. The recent positive policy moves were a huge surprise, for instance.

Opening the gates
In early June 2018, the Ethiopian government announced it would allow domestic and foreign investors to take stakes in Ethio Telecom, the state-owned telecoms firm and Ethiopian Airlines, the state-owned carrier. Other state-owned enterprises (SOEs) up for grabs are Ethiopian Power and Maritime Transport and Logistics Corporation. The state would still retain majority stakes in them, however. Regardless, it is a huge change in policy. In a speech to Parliament in June, Mr Ahmed suggested any sale would be gradual, however; over 10 to 30 years. He was probably being mindful of political sensibilities. A serious plan could not be that longwinding certainly.
More importantly, as much as 40% of Ethio Telecom, which has some 60 million active subscribers already, could be sold to foreign operators like MTN, Vodacom and others who have long expressed interests in operating in the country. The government added a caveat, however, asserting it would need to do a study over a year or two before any policy move.
No such profound pronouncement has been made for the financial services sector talk, however. For the banking sector, there have been some participation by foreign niche players. In February 2015, Ethiopian banks launched mobile money services with the help of foreign fintech firms: “helloCash” by BelCash, a fintech firm based in The Netherlands and “M-Birr” by MOSS ICT, a fintech firm in Ireland. Another example of a foreign financial services company long operating in the country, albeit in partnership with Ethiopian banks, is Visa, a credit and debit card company. Since 2004, it has been providing card services to customers of Ethiopian banks. Despite its vintage in the country, however, it has long asked for room to do more.
And as early as 2015, the government indicated it wanted to develop a secondary fixed income market.
There have been some changes in the financial sector, nonetheless. In June, a new governor was appointed for the National Bank of Ethiopia (NBE), the central bank. There is not much to suggest governor Yinager Dessie, who used to be head of the national planning commission, would be making significant policy changes. Much store is to be put in what Mr Ahmed says and does. And for the banking sector, there is not much as yet. It is certainly inevitable that full banking licenses would be granted to interested foreign banks at some point in the future; especially as the telecoms sector was much more coveted by the government.
Besides, the government already allows some foreign participation in the banking sector. In April 2016, for example, the Ethiopian legislature made amendments to its banking laws as it joined the African Trade Insurance initiative.
Some foreign banks seized the opportunity when the rules were first relaxed. The European Investment Bank opened an office in July 2015, for instance; lending to mostly state-run infrastructure projects. So did South Africa’s Standard Bank months later in October 2015. Other foreign banks in Ethiopia are Commerzbank, a German bank, the Export-Import Bank of India, Bank of Africa, and so on. The trailblazer was Turkish state-owned Ziraat Bank, however, opening an office in April 2015.
That said, there was similar enthusiasm about these sectors being opened up in early 2015. At a summit in Addis Ababa, organised by The Economist, a British newspaper, it was the telecoms sector that seemed like the government had no plans to consider foreign investment at all. Instead, it indicated that it would be more receptive to liberalising the banking sector. That the case is now the reverse, points to the spontaneity and unpredictability of the Ethiopian government; irrespective of who is in power. Besides, any liberalisation of the banking sector would have to be clear on whether banks would still be required to deploy almost a third of their funds to government bonds. There is also the fear that any privatisation programme could be marred by corruption, as has been the case in other African countries, and in fact, elsewhere.
Regardless, something drastic has to be done to stem the country’s economic troubles. China, hitherto a reliable foreign partner for the erstwhile socialist-styled Ethiopian government, has lately been less enthused. Perennial difficulties in securing foreign exchange and tapped out indebtedness by the Ethiopian government to its Chinese counterpart, are reported to be making the Asian nation slow down the pace of its investment in what has perhaps been an exemplary African country; especially in terms of its industrialisation and infrastructural development efforts. In the most recent decade, the Chinese have provided loans to Ethiopia in excess of $13 billion, which were used to develop various infrastructure projects: roads, railways, dams, industrial parks and so on.
There might be other reasons that China is cooling on Ethiopia. Its ambitions in Africa are expanding. And it is likely finding investments elsewhere to be paying off more. Its first army base in Africa is in neighbouring Djibouti, for instance; a nation which Ethiopia incidentally depends on for a way to the sea. Thus strategically, Djibouti is a more strategic partner than Ethiopia.
Kenya, a bigger economy nearby, is also proving to be more exemplary of how China would like to be seen on the continent. Thing is, if the Chinese, perhaps the most ardent supporters of the regime hitherto, now worry about the FX and debt crisis, the problem must be really bad. It certainly points to the urgency for the government to liberalise some sectors of the economy for foreign participation. And if the Ethiopian government is indeed serious about tackling the FX shortage problem, and there are indications it is, the Ahmed administration at least, then the two sectors that it must liberalise at the earliest time possible are the telecommunications and banking sectors.
The Ethiopian government has been sending mixed messages. On the one hand, the Prime Minister has been signalling a change in the way things are done. And yet, another part of the government says something else. In April, the month Mr Ahmed assumed his new position and adopted a refreshingly reformist drift, President Mulatu Teshome Wirtu suggested it was investments in manufacturing that the government was interested in and not the telecoms and banking sectors. It is important to point out at this point that it is not that the government has not been receptive to foreign investment. Because even before the Ahmed administration, the longevity of which is still uncertain, the government had already been relaxing investment restrictions. Hennes & Mauritz (H&M), the Swedish fashion retailer, already has a factory in Ethiopia, for example. So does the American fashion giant PVH. In December 2017, the state also sold the National Tobacco Enterprise to Japanese investors for $434 million. Unilever, the global consumer goods company, has been operating in Ethiopia since 2016. Besides, foreign hotel chains like Hilton, Marriot, Sheraton and so on have been operating in the country for quite a while. In other words, the president was simply reiterating what has been official policy all along.

Rafiq Raji

Twitter: @DrRafiqRaji

• The author, Dr Rafiq Raji, is an adjunct researcher of the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation. This article was specifically written for the NTU-SBF Centre for African Studies