Ethiopia finalises banking liberalisation rules as foreign currency challenges mount
Outside investors have long eyed opportunities in Ethiopia — Africa’s second-most populous country — especially within its financial sector. Mamo Mihretu, governor of the National Bank of Ethiopia, speaks with John Everington about progress on the country’s debt restructuring talks, the fight against inflation and plans to encourage foreign investment in the country.
Ethiopia reached an agreement with bilateral creditors on an interim debt-service suspension in mid-November, and has indicated it will begin talks on the restructuring of a $1bn eurobond that matures in 2024. But what impact will this have on the Ethiopian economy in the immediate future?
Since applying for treatment under the Common Framework in early 2021, Ethiopia remained current on its external debt obligations. However, Ethiopia has faced payments pressures recently, compounded by recent and successive global and domestic shocks. The agreed interim debt service suspension will provide a structured mechanism to re-profile the payments that were falling due during this challenging period; moreover, it will strengthen macroeconomic stability in the years ahead, in the context of an economic reform program supported by the International Monetary Fund (IMF).
Q: The IMF conducted a visit to the country in September/October. How would characterise the discussions that took place?
A: Very positive. As with many IMF programmes, it’s often a long process and involves an extensive exchanges of views. We’re very satisfied with the quality of the conversations we’re having. We’ve been in discussions for some time now; I think we’re coming to the conclusion and will hopefully come to an agreement soon.
Q: Ethiopia has suffered from hard currency shortages for a while now. How are foreign currency reserves at the moment?
A: We are comfortable, and the recent announcement of debt-service suspension will help. We’re working to support export-oriented companies as well as foreign direct investment by relaxing regulations; we are also re-engaging with multiple external partners. In any case, we’re more or less current on our debt servicing obligations, and the programme we’re hoping to agree with the IMF will help even further in building up our foreign exchange reserves.
Q: What are your priorities as a central bank for the remainder of 2023 and into 2024?
A: As you may know, the NBE [National Bank of Ethiopia] has recently laid out a strategy plan for the coming three years, which will see us focus our efforts on the primary task of achieving price stability. The fight against inflation has been a long-standing challenge, and addressing this is our most urgent priority. While inflation has been partly driven by domestic supply side shocks as well as by international price increases, particularly for fuel and fertilisers. Our internal assessment also shows that monetary factors have been an important contributor, which we are addressing accordingly.
To this end, the central bank has tightened monetary conditions by cutting direct advances to the Treasury, by limiting credit growth in the banking system and by raising the interest rates charged on our emergency lending. It is still early days, but we are beginning to see the impact on inflation for certain key items and we expect headline inflation to move towards 20% by the end of the fiscal year in June 2024.
Q: How healthy is Ethiopia’s banking sector and what are your priorities for the sector going forward into 2024?
A: The sector is in a healthy state and broadly stable, with banks well capitalised. The banking sector has roughly doubled in size in the past four years, and we’re looking to deepen that process. Beyond ensuring stability, we’re looking to modernise the sector and open it up to foreign investment, while also increasing and deepening financial inclusion.
We’re in the final stages of putting together a legal and regulatory framework that will enable foreign banks to come and operate in the country. We’re also preparing a more robust supervisory approach for the sector.
Q: Will foreign banks be able to acquire shares — including majority stakes — in existing banks? When are the regulations likely to come into force?
A: It’s our intention to let foreign banks acquire shares in existing financial institutions in the country, open fully owned subsidiaries or merely open a representative branch — which they can do already. The question of majority-owned banks is still under discussion. The draft legislation will go through a process of consultation with existing banks and prospective investors, and will then be reviewed by cabinet before coming into law via an act of parliament, so the details are yet to be finalised. We hope it will become law around the middle of 2024.
Q: In September, the NBE approved the opening of offshore accounts for strategic foreign investors in the country. Are we likely to see other similar reforms soon?
A: Encouraging investments is an important priority for us. The offshore account exemption for strategic investors is a response to a long-standing request from the foreign investment community in the country. Investors want to know that they will be able to repatriate profits and dividends out of the country, which is a reasonable request. So we’ve provided that guarantee for investors that are operating in Ethiopia, creating jobs and adding value to the economy. It’s a priority for the government to update our regulatory environment, and improve our institutions and processes to encourage such investment, and you will see more of this in the coming months.
Q: Ethio Lease, the only foreign-owned financial services company operating in Ethiopia, recently announced it was pulling out of the country, citing changes to the regulatory framework. Could the NBE have done more to help them succeed?
A: This is a case that, in our view, reflects at its core on the company management, their risk management practices and business model.
Regarding regulations governing foreign and domestic borrowings, our policy has not changed in any way since they invested. The company was well aware of this when making their investment decision, as also evidenced by communication on their part prior to their licensing. Therefore, the claims are baseless and unfounded. They are simply shifting blames.
Like any other investment into Ethiopia, we wanted the company to succeed and we went out of our way to support them. We have had several discussions with them and repeatedly responded to their requests so that they can thrive. They know this. But at the end of the day, it’s their decision whether they want to operate in this country. I don’t think that their withdrawal says anything about the opportunities now becoming available for foreign investors in the banking as well as capital markets space in Ethiopia.