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Strict limits on bank reforms as war economy constrains government

Foreign exchange shortages worsen and lending slows as financial pressures mount 

Foreign banks hoping to start up in Ethiopia following its banking liberalisation will have to navigate another set of rules: they will only be awarded operating licences if they partner with local banks. And this opening will be limited to regional banks.

Operating conditions have deteriorated for banks since the federal government's conflict with the Tigray regional government started in November 2020. Local banks have cut lending sharply as foreign inflows have fallen to around US$750 million in the first nine months of fiscal 2021-22; that's down from over $3 billion in fiscal 2019-20.

This caveat comes months after the Ethiopian government announced that it had constituted a liberalisation committee to work towards replacing the country's decades-old financial services code. This was in line with Prime Minister Abiy Ahmed's pledge when he took office in 2018, to liberalise the telecoms and financial services (Dispatches, 11/4/22, As economy stalls, Abiy plans to open banking sector).

It is good news for regional lenders, such Kenya's Equity and Kenya Commercial Bank (KCB) Group, that have operated representative offices in Addis Ababa for some years, in the hope of benefiting from liberalisation.

These representative offices were banned from generating deposits or lending directly to Ethiopian companies and households. But they could conduct research and credit assessments to allow lending from their headquarters in Kenya, opening opportunities for trade or export finance for local banks.

Analysts say the liberalisation is likely to prompt several mergers and acquisitions. The Addis Ababa government's launch of the first stock exchange in the Horn of Africa this month, the Ethiopian Securities Exchange, should also speed investments. At least 50 Ethiopian companies are due to list their shares on the bourse including state-owned corporations Ethio Telecom and Ethiopian Airways.

Part of this has been forced on the government by rising financial pressures. It will have find ways, such as issuing treasury bills, to fill the widening fiscal deficit. This year's budget envisages spending of 785bn birr ($15bn) compared with the 561bn birr it had originally planned.

As growth slows to a projected 6.6% this year, down from the intially forecasted 8.7%, officials worry about the effects of inflation, now running at 37%. Government officials hope that an upswing in foreign earnings could help bring down prices.

'The first target is to boost the foreign currency inflow,' said an analyst working on liberalisation, '…there are many legal framework revisions underway, and many are in a draft stage.'

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