Africa: Ethiopia’s credit imperative

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Impressive growth could stall if dynamic local businesses don’t benefit from an opening up of the banking sector.

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Over the last decade, Ethiopia has been lauded for its strong economic growth. Policies focusing on developing the manufacturing, industrial and agricultural sectors have transformed it into a country defined by entrepreneurship and resourcefulness. 

High-rise buildings, well-paved tarmac roads and a pioneering light railway system have come to characterise the country’s capital Addis Ababa, as opposed to the images of famine which once flooded mainstream media.

Much of this development has been possible through public funds, with around 70% of government revenue spent on infrastructure and development. The private sector has begun to play a pivotal role as well: local and regional businesses are taking advantage of policies which encourage the private sector to pick up the slack and support economic growth. In terms of textiles and manufacturing, for example, Ethiopia is proving to be a cheaper yet reliable alternative to some of Asia’s more expensive markets.

Yet, Ethiopia’s authorities are doing themselves a disservice. While local businesses and international investors are given more or less free rein to invest in sectors such as manufacturing and agriculture, international investment into the banking and financial services sector is prohibited

Brick wall

Ethiopia has ambitious goals for economic development as stipulated in the country’s second Growth and Transformation Plan, which came into action in 2015. International capital will be essential to fuelling this growth and without it, Ethiopia could hit a brick wall.

Government officials explain that there is more than enough credit available to the private sector in Ethiopia and that both private and state-owned banks have enough cash to dole out to private and public development initiatives. Development finance institutions, they say, fill the shortfall. 

But smaller, local corporates on the ground, without the track record of larger, well-known businesses claim that it is difficult to find affordable, if any, credit in the current system. Indeed, even private capital is lawfully siphoned off to buy government bonds and pay for public projects as opposed to important and supportive private equivalents. As the World Bank has found, credit to the private sector has been diminishing over the last 10 years. 

Arguments that international banks with big balance sheets and global connections will mean that local banks suffer are understandable but unfounded. While they will be subject to the same rules and regulations as local banks, some argue that there is more likely to be collaboration and not competition between international and local banks. 

Locals wish to learn of new products and take advantage of international networks, while large regional and international banks would be keen to understand local nuances. Allowing international bank capital into Ethiopia could ease some of the pressure for smaller corporates and businesses, integral to Ethiopia’s sustained growth. 

Without any internal changes and the loosening of restrictions on local banks in terms of the credit they can offer, Ethiopia’s economy could slow without the capital to fuel growth and reform will become a necessary consequence. It would be better to reform now, and let in international capital, before the economy starts to stutter and the authorities are forced to do this, under different terms.