Ethiopia Opens Banking Sector to Foreign Investment
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Loading... - Sophia Afari
- 19 Dec 2024
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Ethiopia is set to partially open its banking sector to foreign banks following a recent vote by lawmakers, marking a significant shift in the country’s economic policy. This decision aligns with Prime Minister Abiy Ahmed's ongoing efforts to liberalize the heavily state-controlled economy since he took office in 2018.
According to local media outlet FanaBC, the new banking law allows foreign banks to establish subsidiaries in Ethiopia, although they will be limited to owning only 49 percent of shares in these entities. This move is seen as a crucial step towards enhancing competition within the banking sector and attracting foreign investment across various industries.
Independent analyst Samson Berhane commented on the implications of this development, stating, "It is a big step forward, as the opening of the banking sector doesn't only mean more foreign banks in the country, but it is also critical for attracting foreign investment in other areas." He noted that this reform is part of a broader strategy to signal that Ethiopia is open for business.
The decision to open the banking sector comes amid a series of economic reforms aimed at stabilizing the Ethiopian economy, which has faced significant challenges in recent years. Internal conflicts, particularly the civil war in the northern Tigray region from 2020 to 2022, have led to sanctions from the United States and have hampered the pace of reforms.
In July, Ethiopia made the difficult choice to allow its currency, the birr, to float freely against the dollar. This decision resulted in a sharp decline in the birr's value but was deemed necessary as the previous dollar peg was unsustainable, especially with foreign currency reserves nearing zero. The International Monetary Fund (IMF) and the World Bank had withheld a combined $4.9 billion in aid and financing until Ethiopia accepted the need for currency liberalization.
Ethiopia, Africa's second most populous country with approximately 120 million people, experienced remarkable economic growth rates—often exceeding 10 percent annually—between 2004 and 2019. However, the economy has since been adversely affected by internal conflicts, the COVID-19 pandemic, and the global repercussions of the war in Ukraine.
According to the World Bank, economic growth slowed to an average of 5.9 percent between 2020 and 2023, while inflation surged from 20.4 percent to 30.2 percent during the same period. The opening of the banking sector is seen as a potential catalyst for revitalizing the economy and attracting much-needed foreign investment.
Ethiopia's decision to open its banking sector to foreign investment represents a pivotal moment in the country's economic reform journey. By allowing foreign banks to establish a presence in the market, the government aims to enhance competition, attract investment, and ultimately stabilize the economy. As Ethiopia navigates the complexities of its internal challenges and seeks to re-establish itself on the global economic stage, these reforms could play a crucial role in shaping its future growth trajectory.
