Why Ethiopia is unlikely to loosen grip on banks sector

Ethiopian Prime Minister Abiy Ahmed (left) and President Isaias Afeworki of Eritrea celebrate the opening of the Embassy of Eritrea in Ethiopia following the official visit after 20 years, in Addis Ababa on July 13. AFP PHOTO  

By GEORGE BODO

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Summary

• State-owned banks seem to be major funding sources for the Ethiopian government.

Ethiopia seems to be on the cusp. Since Prime Minister Abiy Ahmed came into office in April 2018, Ethiopia has laid down a series of reforms, most notably softening its stranglehold on key sectors of
the economy, namely aviation, logistics, telecoms and energy. But there is a prelude to all this.

Between 2003 and 2011 Ethiopia recorded sustained double-digit real gross domestic product (GDP) annual growth rates; after which, while circling within the 10 per cent range, growth trended in a peak-and-trough pattern up to 2017, perhaps reflecting a slack in growth momentum. In fiscal year 2015/16, the country’s annual real GDP growth rate slumped to a 12-year low of eight per cent.

Essentially, it has been a classic mixed-bag story since 2012. But perhaps a rather more worrying trend was recorded in the country’s external trade position, to the extent that current account balance worsened to $6.5 billion in 2017 (or just about nine per cent of its GDP). To help ameliorate the situation, authorities thought the country could do with some of currency devaluations, which delivered little or no harvest.

Consequently, the country’s reserves took a huge toll. By the close of 2017, Ethiopia’s gross reserves could only cover two months of imports. At that quantum, combined with the fact that the economy’s foreign exchange earning capacity is increasingly tenuous at best, the country urgently needed to attract foreign exchange.

That required taking certain bold decisions. And Abiy Ahmed decided to rise to the plate—hence the reforms. However, while the country is seemingly on course to open up the economy, the Ethiopian State may still be reluctant to loosen its grip of the banking sector. For starters, Ethiopia’s banking system is dominated by State-owned banks.

There are 18 licensed commercial banks, out of which two, Commercial Bank of Ethiopia and Development Bank of Ethiopia, are State-owned. The rest are domestically majority-owned.

In 2017, these two juggernauts controlled a third of branch distribution as well as 65 per cent of system non-bank deposits. Further, they controlled nearly 60 per cent of total outstanding loans. It gets interesting when it comes to lending activities.

Firstly, the Ethiopian Government seems to have certain key focus sectors (just like the Big 4 Agenda in Kenya). Indeed, there seems to be a strong focus on agriculture, industrial activities, trade and infrastructure (housing, transport and communications). Implicitly, the two State-owned banks seem to align their lending activities to these four.

READ: Safaricom, KCB look North as Ethiopia opens market

Between 2008 and 2017, lending to the four sectors accounted for 70 per cent of the two State-owned banks’ loan book, on average terms. Private banks don’t seem to be aligned, with lending to the four sectors only accounting for 26 per cent of their loan books in the same period, on average terms.

Secondly, the two State-owned banks seem to be major funding sources for the government. In 2017, 15 per cent of their lending went to the central government.

The private banks, on the other hand, didn’t care much and didn’t buy any of the government-issued debt securities. For the State-owned entities, lending to the central government as well as the four key sectors accounted for a staggering 85 per cent of their loan books in 2017.

Essentially, these two juggernauts, especially Commercial Bank of Ethiopia, by virtue of controlling the deposit franchise, perform the function of resource mobilisation for the government.

Since opening up the sector to foreign-owned players is a classic market share battle powder keg, it may not be in the Ethiopian Government’s best interest to have them cede control of the resource mobilisation franchise to a more aggressive non-domestic player(s). But who knows.