Ethiopia is on the cusp. Since Prime Minister Abiy Ahmed came into office in April 2018, Ethiopia has laid down a series of reforms, most notably softening its stranglehold on key sectors such as aviation, logistics, telecoms and energy.
But there is a prelude to all this. Between 2003 and 2011, Ethiopia recorded sustained double-digit real GDP annual growth rates; after which growth peaked in 2017.
In the fiscal year 2015/16, the country’s annual economic output slumped to a 12-year low (real GDP at eight percent year-on-year).
But perhaps a rather more worrying trend was recorded in the country’s external position, as the current account balance worsened to a deficit of $6.5 billion in 2017 (about nine percent of its GDP at the time).
To help reverse the situation, authorities thought the country could do with some of the currency devaluations, which delivered little or no harvest. The country’s reserves have taken a huge toll. For instance, in the fiscal year 2020/21, Ethiopia’s gross reserves could only cover two months of imports.
That level, combined with a weakening foreign exchange earning capacity of the economy meant the country urgently needed to attract foreign exchange inflows.
And that required taking certain bold decisions. Hence the reforms. The latest step(s) taken by authorities is to open up domestic banking (as well as telecoms) sectors to foreign players.
However, when Ethiopia opens its banking sector, it will not be successful on day one for foreign-domiciled players. They would need to navigate a number of constraints.
First, Ethiopia’s banking system is dominated by State banks. There are 19 licensed commercial banks, out of which two, namely Commercial Bank of Ethiopia and Development Bank of Ethiopia, are State-owned. The rest are domestically majority-owned.
Commercial Bank of Ethiopia has the largest deposit franchise, accounting for a third of the countrywide branch network and controls more than half of customer deposits.
Additionally, they controlled 60 percent of outstanding loans and advances. The two State-owned banks also serve as policy banks.
This means that the allocation of liquidity is aligned with the government’s economic growth agenda.
The Ethiopian government has certain priority sectors and there seems to be a strong focus on agriculture, industrial activities, trade and infrastructure.
These banks appear to have aligned their lending to these four priority sectors. Between 2008 and 2017, lending to the four sectors accounted for 70 percent of the two State-owned banks’ loan books on average terms.
Essentially, these two juggernauts perform the function of resource mobilisation for the government.
Apart from having to battle the policy banks, Ethiopia is an inward-looking society (and largely anti-foreign), which is largely historical.
It was the only country that successfully resisted colonisation by the European powers.
Additionally, it has its own Ethiopian Orthodox calender which has 13 months. The Ethiopian year starts on September 11 or on September 12 in a Gregorian leap year.
It is seven to eight years behind the Gregorian year. The current year in Ethiopia should be 2015.
As a result, a successful entry strategy for any foreign bank requires a very localised model that incorporates local knowledge.
Finally, any new entrant will also have to contend with the fact that Ethiopia is not a homogenous society and there are different (ethnic) groups competing for control of resources and dominance, the conflict between the Federal Government and the Tigrayans just a tip of simmering underground tensions.
These conflicts introduce an element of political risks, which have to be priced in.
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