Comments Off on Ethiopia takes first step towards liberalising finance sector | Financial Times

Ethiopia takes first step towards liberalising finance sector | Financial Times

Ethiopia takes first step towards liberalising finance sector | Financial Times

Ethiopia takes first step towards liberalising finance sector

Granting of licence to foreign-owned company is latest effort by Abiy to speed growth

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The issuance of the licence by the central bank marks the first major shift in financial services policy since Prime Minister Abiy Ahmed took office in 2018 © Reuters

Ethiopia has taken the first steps towards liberalising its tightly controlled financial sector by granting a business licence to a foreign-owned company for the first time.

The move by the Ethiopian central bank is the latest effort by reformist prime minister Abiy Ahmed to open previously state-controlled sectors to foreign investment and the first big shift in financial services policy since he took office in 2018.

Ethiopia recorded annual growth of 10 per cent for more than 10 years until 2017 as the government kept a tight grip on key sectors and reinvested the profits in infrastructure, health and education.

But western donors frequently complained that a lack of foreign investment and expertise was preventing even faster growth. In more recent years the economy has run into capacity constraints and chronic shortages of foreign exchange.

Mr Abiy has promised to accelerate growth by encouraging outside investment and shifting gradually but decisively towards a more liberal approach to economic management.

The licence issued on Thursday by the National Bank of Ethiopia went to a unit of the New York-based Africa Asset Finance Company. It will allow the US group to lease imported equipment, including farm machinery and computer servers, to Ethiopian companies under local currency contracts, helping industry to bypass the currency and capacity constraints that have become barriers to growth, said Frans Van Schaik, chief executive of AAFC.

“It’s crucially important. Ethiopia is trying to liberalise its economy and opening up its financial services sector is an important element,” Mr Van Schaik told the Financial Times.

AAFC’s wholly owned local unit, Ethio Lease, will be the first company of any kind to provide equipment leasing services in Ethiopia.

“Ethio Lease promises to be a game changer . . . we believe this venture has a huge potential to boost the economy, while providing significant financial gains for the country,” said Yinager Dessie, central bank governor, in a statement.

Foreign currency shortages have become particularly acute since 2017 due to low export revenues and tight government control of the exchange rate, which has made it difficult and expensive for Ethiopian businesses to fund imports.

As a result, AAFC estimates there is huge pent-up demand for foreign equipment and a potential leasing market worth at least $1bn. Ethio Lease will procure the equipment outside of Ethiopia in foreign currency and then lease it to local companies in Ethiopian birr, helping businesses to circumvent current bottlenecks and manage currency risk.

Ashley Elliot, managing partner at investment advisory firm Sofala Partners, said the news represented important progress even if foreign investment in the country’s banks is expected to remain off-limits for now.

“For me, it suggests that the personnel changes we saw last year at the finance ministry and central bank are slowly bearing fruit in terms of a more pragmatic, market-friendly approach to regulation of Ethiopia’s historically closed financial sector,” said Mr Elliot.

Other reforms are expected to start before the end the year, including a multibillion-dollar privatisation of the telecoms sector and the sale of stakes in energy, shipping and sugar companies. The government has also said it plans to launch a domestic stock exchange in 2020.

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