Ethiopia Economic Reforms: Can Foreign Banks’ Entry Be a Catalyst for Economic Growth in Ethiopia?
- Adem Aman
- 28 Haz
- 7 dakikada okunur
Global South, particularly SSA societies, sustain their living as unprivileged due to economic handicaps. Improving these people’s living standards through economic reform like financial liberalization, implementing structural adjustment programs aligned with global financial institutions, and allowing foreign direct investments as a tool in most African nations for decades has been its pros and cons on the continent's economic development directly and indirectly. Currently, Ethiopia has made a breakthrough in reforming macroeconomic policy to enable banking sectors; approving a proclamation that allows foreign banks to operate in the countries is feasible as a potentially impactful strategy; and the SAP system had been framing in the light of the IMF and The World Bank lead for credit expansion or availability and foreign currency supply improvement. However, SAP was criticized by the majority because the one-size-fits-all approach has its problems. These elements are crucial for assessing the broader potential for development in Ethiopia and across the African continent. This analysis will examine Ethiopia's recent economic trajectory by focusing on economic liberalization, allowing foreign banks’ entry into Ethiopia’s banking industry, digital finance (Fintech) expansion, and market-based policy structure.
Economic Reforms and its Benefits
Economic reforms typically focus more on removing or reducing government restrictions rules and regulations somehow on the economy and austerity, particularly in terms of trade, business operations, and foreign investments. Ethiopia's macroeconomic reforms could involve market reforms, trade openness, privatization, and/or private-public partnerships. Market reforms are a strategy focused on deregulating key sectors like telecommunications, transportation, industry expansion, and energy and power resources, as well as encouraging sound strategic competition and innovation by elimişnating subsidies and governmental austerity. It is supposed that the financial liberalization program opens up international trade by reducing tariffs and other barriers, which could boost exports, diversify the economy, and reduce dependency on a few sectors (e.g., agriculture). Additionally, privatization is focused on the privatizing of state-owned enterprises such as telecommunication, Ethiopian Airlines, cement factory, Sugar factories, and other large public-owned enterprises to private sector businesses. Additionally, trade openness also enhances the gradual economic growth associated with import and export in international trade including currency devaluation, tariff improvement, and deregulation which could foster a more vibrant entrepreneurial ecosystem.
Conversely, firstly, economic reforms could attract more FDI, contributing to economic growth, infrastructure development, and job creation. Secondly, economic reforms increase efficiency and productivity for sound robust competition from foreign and local businesses. And also, thirdly, this reform is supposed to lead to better resource allocation, innovation, and productivity. Lastly, the economic reforms via financial liberalization encourage diversification of the economy through market-based policies focused on creating an enabling environment where the private sector plays a major role in driving economic growth. Thus, in this case, the government has planned to adopt a series of policies aligned with the;
Fiscal and monetary reforms;
Infrastructure investment;
Agricultural transformation;
Telecommunication expansion;
Technology and Innovation.
Theoretically, macroeconomic reform and liberalization involve reducing regular hindrances of government intervention in the economy, promoting free markets, and enhancing competition. But practically there is a lot of inflation and tariff increases, which creates an expensive lifestyle that highly impacts major or ordinary societies. It has implemented economic reforms in recent years through the "Homegrown Economic Reform Plan." Ethiopia aims to modernize its economic policy by encouraging the expansion of the private sector-led economy programs and improving its infrastructure. Market-based reforms can stimulate long-term economic growth by 1) encouraging private sector–economic–led development, which is vital for job creation and innovation. 2) Attracting more FDI, as a competitive and efficient market creates an attractive investment environment. And 3) Alliavating poverty by ensuring that growth is inclusive and broad-based.
The Role of Foreign Entry for Investment In Ethiopia
Opening up Ethiopia’s economy to foreign investments was not a new phenomenon at all. What is new is allowing foreign banks to operate in the country in Ethiopia as branches or buying local bank shares in limited amounts, associated with the bank reform proclamation. Although the market openness resulting from economic reforms has been supported by governments and policymakers, a significant portion of the population, particularly underprivileged groups, is deeply concerned about the overall impact on economic and social issues. Due to the new currency rate change, the market experienced significant shocks, causing prices to skyrocket and resulting in various pros and cons. To mention some of the advantages, the Capital inflow from Foreign investment would provide much-needed capital for development projects, infrastructure, and industry. This move also highly encourages new development in the areas of technology infrastructure and transfer mainly supported by foreign investors often bringing advanced technologies, management practices, and expertise that can improve the efficiency and quality of local industries. Such a bold move will also impact new job creation and skills development. Foreign companies often employ many locals and provide opportunities for skill development, particularly in advanced sectors such as manufacturing, technology, and services. We will see its cons under the challenges subtitle below.
In all its pros and cons, allowing foreign banks to operate in Ethiopia can have several positive outcomes. It also increases competition in the banking Sector. The reason is that Foreign banks can bring modern banking products, improved customer service, and efficient management, leading to better access to financial services. With more players in the banking system, underserved regions or populations can gain better access to banking and financial services, increasing financial inclusion. Foreign banks often have better positions and potential in access to international capital markets, which can bring in much-needed capital for both local businesses and government projects. This also fosters local businesses' access to credit, which is crucial for expanding production, investment, and job creation.
Fintech and Digital Financing
The growth and proliferation of digital finance and fintech is a global trend, not just a phenomenon in Africa or Ethiopia. Digital finance (fintech) is an emerging and transformative sector with the potential to revolutionize economic development. Historically underserved by traditional banking, Ethiopia has embraced mobile money services such as M-Birr and HelloCash, enabling millions of people to access financial services. The rise of mobile money payment and transactions is particularly beneficial for increasing financial inclusion and providing credit to small businesses and rural populations. Renovated fintech systems in mobile payments, digital wallets, and mobile lending platforms can significantly boost economic activity. These technologies are essential in closing the financial inclusion gap, especially in Ethiopia, where a significant portion of the population remains unbanked. Digital financing tools enable more efficient money transfers, micro-loans, and investment opportunities, empowering both individuals and businesses.
Despite facing significant challenges, the economic reforms have overall socio-economic impacts, suggesting that allowing the entry of foreign banks could be important in this context. First, with improved living standards as GDP grows and the economy diversifies, the government could have more resources to invest in public goods such as education, healthcare, and infrastructure. This could directly improve living standards by providing better access to basic services. Secondly, economic liberalization could encourage investment in areas, boosting agricultural productivity and creating rural jobs in agribusiness could improve local agricultural practices and provide better market access for farmers. Lastly, a policy should foster poverty alleviation by growing the economy by creating more job opportunities, particularly in the manufacturing and services sectors for entrepreneurship. In addition, fintech supports Ethiopia's social safety nets through digital financing, which could ensure that the benefits of growth are more widely distributed. Furthermore, foreign investments often come with infrastructure development, such as roads, ports, and energy projects. These projects benefit not only the economy as a whole but also improve the quality of life for citizens.
The Challenges and Risks
Due to various internal security issues and the aftermath of the Ethiopia-Tigray conflict, Ethiopia's economic growth has been severely impacted. As a result, many experts view the market-based economy, which has been adopted overly ambitiously, as carrying potential risks. Ethiopia has faced political instability for decades, which can hinder economic progress. Historical evidence suggests that if reforms are not carefully managed, they may trigger other socio-economic and political crises, leading to prolonged instability and insecurity. Additionally, factors such as corruption, weak rule of law, and inadequate regulatory frameworks pose significant challenges that could undermine the benefits of economic reforms. While economic liberalization has the potential to boost growth, poor management of these reforms can result in social impacts and increased inequality. Specifically, growth benefits may become concentrated in certain sectors, regions, or among select business owners. Therefore, monitoring reform policies to ensure inclusive growth is essential for fostering peace, maintaining national security, and strengthening institutional capacity effectively and efficiently.
Hence, the lack of peace and security issues towards emerging countries face often stem from heavy reliance on the wrong policy and lack of good governance. So if Ethiopia's macroeconomic and financial sector reform policies, towards attracting foreign investment and allowing foreign banks to operate do not prioritize the welfare of its low-income population, the country can face an economic catastrophe. On the other hand, this could leave it vulnerable to external socio-economic shocks, particularly those related to global commodity price change, especially during periods of high inflation and foreign currency shortages due to exchange rate fluctuations.
On the other hand, without significant investment in quality education and training programs to enhance skills and develop human resources, it has been difficult to establish well-organized and adequate healthcare facilities. These elements are crucial to ensure a productive workforce that can fully benefit from the digital era and the opportunities provided by digital financing through market-based reforms. Additionally, infrastructure and connectivity, such as roads, electricity, logistics, and telecommunication, are still insufficient across the country, with most resources concentrated only around the capital city. Continued investment in infrastructure—especially in rural areas—is necessary to ensure that the benefits of economic liberalization, Fintech, and other reforms are widely shared. Lastly, strong and adaptable regulatory compliance frameworks are essential, particularly in sectors like Fintech, to ensure these industries grow responsibly and sustainably.
Conclusion and Remarks
Improving living standards in Ethiopia is essential for societal benefits nationwide. Additionally, it is important to assess and review the structural adjustment program (SAP), which relies on a “one-size-fits-all” approach promoted by the IMF and World Bank. This system, however, tends to create economic inequality and social injustice in the short term for marginalized communities. Furthermore, increasing foreign investments and ensuring that inclusive growth benefits are prioritized can help expand the banking sector to foreign investors. Nevertheless, the success of the SAP approach depends on strong political will, government support, improved institutional capacity, and a commitment to inclusive and sustainable development. These strategies have the potential to transform economies, reduce poverty, and improve living standards across both Ethiopia and Africa at large, provided there is a balanced approach in government and private sector policies that address political stability, infrastructure gaps, and human capital development challenges. In digital finance, Ethiopia has rapidly advanced to become a leader in this sector within Africa. Moving forward, it is crucial to ensure the success of this strategy by focusing on improving quality education and skills development to capitalize on economic and social opportunities, along with developing a robust infrastructure network—including roads, electricity, and ports. Additionally, establishing clear, fair, and supportive policies to manage foreign and domestic investments will particularly benefit sensitive sectors like banking.
Reference
Foreign Direct Investment In Ethiopia, Benefits And Roles: https://www.researchgate.net/publication/379805849_FOREIGN_DIRECT_INVESTMENT_IN_ETHIOPIA_BENEFITS_AND_ROLES
International Trade Administration: Ethiopia- Market Challenges: https://www.trade.gov/country-commercial-guides/ethiopia-market-challenges
A Homegrown Economic Reform Agenda: A Pathway to Prosperity:
Foreign Banks’ Entry Would Boost Ethiopia’s Economic, Competitiveness:
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