Ethiopia launched a demonetisation process in September, issuing fresh banknotes in an effort to curb cash-hoarding and to crack down on illegal activities such as tax evasion.
The move prompted 1.3m unbanked Ethiopians to hand in their old cash in exchange for a bank account from which they could draw the new notes, providing a boost to the 19 banks operating in one of Africa’s most tightly state-controlled banking systems.
“This is a success in terms of bringing many people to banks,” said prime minister Abiy Ahmed, who came to power in 2018 promising a sweeping economic overhaul.
The move was the most radical step in a reform plan that the government hopes will deliver a boost to much-needed foreign investment in the banking sector and in other parts of the economy. But critics say reform should go much further, to challenge entrenched attitudes among policymakers who have so far resisted change.
A driving force behind the reforms is Yinager Dessie, the Austria-educated governor of National Bank of Ethiopia. He feels people rushed to the banks because “the trust between the banks and the people is huge. In our history there is no bankrupt bank. So, we have a very aggressive, tight supervision.”
Ethiopia has taken small steps towards liberalising its tightly controlled financial sector by granting licences to foreign-owned banks — such as Kenya’s Equity Bank and KCB — enabling them to create representation offices in the country of 110m people.
However, the licences offer little more than a foothold in a country where the central bank established a minimum deposit interest rate of 7 per cent, but where lenders set their own unbenchmarked loan prices amid inflation of about 20 per cent.
“We have not [got fully operating] international banks here; they are not allowed here because we want to make our local banks strong,” says Mr Yinager.
Indeed, the state-owned Commercial Bank of Ethiopia (CBE) covers almost 60 per cent of Ethiopian banking activities. A September research note by credit rating agency Moody’s warned the lack of commercial foreign banks had resulted in a “dominance of state-owned banks”, which account for about three-quarters of Ethiopia’s total banking assets.
In an interview with the Financial Times, Mr Yinager says that although “it will take some time” before foreign banks are permitted to fully operate in Ethiopia, the country’s banking sector “will not be closed all the time”.
He adds that more than a dozen commercial banks are seeking approval to set up shop in Ethiopia where, according to the World Bank, 35 per cent of adult Ethiopians held bank accounts in 2017, below the 43 per cent average in sub-Saharan Africa.
“We are encouraging the private sector to [buy into] digital fintech operators. We have recently introduced a directive that allows non-financial institutions to operate. Anyone who fulfils the criteria can be engaged and it is not expected to be a financial institution. Now we are trying to expand this mobile banking, internet banking,” Mr Yinager adds.
Ethiopia recorded annual average GDP growth of roughly 10 per cent from the 2008-09 financial year to 2018-19, as the government kept a tight grip on key sectors such as services, agriculture and manufacturing. Ethiopia’s economic growth slowed to 6.1 per cent in the 2019-20 fiscal year to July, down from the 10.8 per cent originally forecast by the central bank before the coronavirus pandemic hit.
However, western donors and some investors complain that a lack of foreign investment is preventing faster growth, highlighting the shortages of foreign capital that the country has seen recently.
An adviser to African banks who follows Ethiopia closely casts doubt on the country’s reformist plans. “The mentality, which has been there since the 1950s and 1960s, is to make sure that government’s favoured business plans work out. The mentality was never, still today, that we should have a thriving competitive banking system that underpins a modern capitalist economy,” the adviser says.
Arkebe Oqubay, senior adviser to the country’s prime minister, says the “Ethiopian government is pursuing economic reforms despite the Covid-19 pandemic”. The central bank’s plans form part of the drive to open previously state-controlled sectors to overseas investors to boost the inflow of foreign capital.
Foreign currency shortages have become commonplace in Ethiopia due to low export revenues and tight government control of the exchange rate. This has made it expensive for Ethiopian businesses to fund imports in a country where foreign reserves stood at $3.1bn at the end of the fiscal year to July — enough to cover about two months of imports.
Other expected reforms include selling a stake in Ethio Telecom, the country’s telecoms monolith, and the issuance of new mobile licences, which Mr Yinager says has attracted the interest of South Africa’s Vodacom and MTN, and France’s Orange. “With the privatisations, we expect to get some amount of dollars in the coming years,” he says.
With banking and insurance still being the realm of local investors, Ethiopia plans to launch a domestic stock exchange. “We have now drafted a proclamation to establish a capital market in this country. So that’s one big reform we have right now to implement in the coming months,” says Mr Yinager.
“It will be open for everyone — first banks, insurance, and big state-owned enterprises. We think and believe that these big companies will be the primary actors for the capital market.”
Source: Economy - ft.com
