Capital Markets and Portfolio Investment

Credit is tight and banks often require 100 percent collateral, making access to credit one of the greatest hindrances on the Ethiopian economy writ large.  A 2011 measure requiring non-government banks to invest the equivalent of 27 percent of their loan disbursement portfolio in National Bank of Ethiopia (NBE) bonds has exacerbated liquidity shortages.

Ethiopia does not have securities markets, and sales/purchases of debt are heavily regulated.  The government is drafting legislation to regulate the over-the-counter market for private share companies.  In March 2019, Moody’s reaffirmed Ethiopia’s credit worthiness at ‘B1 stable,’ while S&P and Fitch maintained their original rating of ‘B.’  According to Moody’s, Ethiopia’s credit profile reflects its very high levels of economic growth; strong investment in infrastructure, energy, and manufacturing; and, low debt-servicing costs set against challenges that include external vulnerability risks and internal stability problems.  Moody’s expects Ethiopia’s economy to grow by approximately 8 percent over the next few years. It puts external vulnerability, geopolitical risk, continued social unrest, and the vulnerability of its relatively small economy to weather cycles and volatility in coffee and gold prices as the key credit challenges going forward.  Conversely, successful export diversification, the smooth and timely completion of infrastructure programs, improved business conditions, a structural reduction of external vulnerabilities leading to a steady accumulation of foreign exchange reserves, and a cessation of domestic and regional geopolitical tensions would all improve Ethiopia’s credit profile.

The Ethiopian government has announced, as part of the overall economic reform effort, its intention to liberalize the financial sector, to include introducing capital markets, opening the banking sector to foreign companies, expanding credit available to the private sector, enabling a system of e-commerce, and expanding the monetary policy tools available to the NBE.  While most outside observers believe that PM Abiy Ahmed and other key economic officials are sincere in their intentions, entrenched interests, low capacity, and financial constraints will likely delay the full implementation of these goals.

The government offers a limited number of 28-day, 3-month, and 6-month Treasury bills, but prohibits the interest rate from exceeding the bank deposit rate.  The government began to offer a one-year Treasury bill in 2011, with yields currently below 3 percent. This market remains unattractive to the private sector and 100 percent of the T-bills are held by public enterprises, primarily the Public Social Security Agency and the Development Bank of Ethiopia.  The NBE plans to introduce a market for government securities, corporate bonds, and a stock market.

In December 2014, Ethiopia issued its first eurobond, raising USD 1 billion at a rate of 6.625 percent.  The 10-year bond was oversubscribed, indicating continued market interest in high-growth sub-Saharan African markets.  According to the Ministry of Finance, the bond proceeds are being used to finance industrial parks, the sugar industry, and power transmission infrastructure.  Due to an increasing external debt load, the Ethiopian government has committed to refrain from non-concessional financing for new projects and to shift ongoing projects to concessional financing when possible.

The Ethiopian Commodity Exchange (ECX), launched in 2008, trades commodities such as coffee, sesame seeds, maize, wheat, mung beans, chickpeas, soybeans, and green beans.  The government launched ECX to increase transparency in commodity pricing, alleviate food shortages, and encourage the commercialization of agriculture. Critics allege that ECX policies and pricing structures are inefficient compared to direct sales at prevailing market rates, triggering an amendment to the ECX law in July 2017, which eliminated a number of criticized regulations, and permitted the trading of financial instruments at a future date.  This amendment paves the way for securities markets in the future using the framework of the commodities exchange.

Money and Banking System

Ethiopia has seventeen commercial banks, two of which are state-owned banks, and fifteen of which are privately owned banks.  The Development Bank of Ethiopia, a state-owned bank, provides loans to investors in priority sectors. In September 2011, the NBE raised the minimum paid-up capital required to establish a new bank from ETB 75 million to 500 million, which effectively stopped the entry of most new banks.  Foreign banks are not permitted to provide financial services in Ethiopia; however, since April 2007, Ethiopia has allowed some foreign banks to open liaison offices in Addis Ababa to facilitate credit to companies from their countries of origins. Chinese, German, Kenyan, Turkish, and South African banks have opened liaison offices in Ethiopia, but the market remains completely closed to foreign retail banks.

Based on recently made available data, the state-owned Commercial Bank of Ethiopia mobilizes more than 60 percent of total bank deposits, bank loans, and foreign exchange.  The NBE controls the bank’s minimum deposit rate, which now stands at 7 percent, while loan interest rates are allowed to float. Real deposit interest rates have been negative in recent years, mainly due to inflation.

Foreign Exchange and Remittances

Foreign Exchange

All foreign currency transactions must be approved by the NBE.  Ethiopia’s national currency (the Ethiopian birr) is not freely convertible.  In September 2018, the GOE removed the limit on holding foreign currency accounts faced by non-resident Ethiopians and non-resident foreign nationals of Ethiopian origin.

Foreign exchange reserves were heavily depleted in 2012 and have remained at critically low levels since then.  By June 2018, gross reserves were USD 2.2 billion, covering approximately 1.6 months of imports. According to the IMF, heavy government infrastructure investment, along with debt servicing and a large trade imbalance, have all fueled the intense demand for foreign exchange.  In addition, the decrease in foreign exchange reserves has been exacerbated by weaker-than-expected earnings from coffee exports and low international commodity prices for other important exports such as gold and oil seeds. Businesses encounter delays of six months to two years in obtaining foreign exchange, and they must deposit the full equivalent in birr in their account to begin the process to obtain foreign exchange.  The foreign exchange crunch has intensified recently, with delays of more than a year reported. Slowdowns in manufacturing due to foreign exchange shortages are common, and high-profile local businesses have closed their doors altogether due to the inability to import required goods in a timely fashion.

Although government policy gives the repatriation of profits “priority,” in reality, due to the foreign exchange shortage, companies have experienced delays of up to two years in the repatriation of larger volumes of profits.  Local sourcing of inputs and partnering with export-oriented partners are strategies employed by the private sector to address the foreign exchange shortage, but access to foreign exchange remains a problem that limits growth, interferes with maintenance and spare parts replacement, and inhibits imports of adequate raw materials.

The foreign exchange shortage distorts the economy in a number of other ways: it fuels the contraband trade through Somaliland because birr is an unofficial currency there and can be used for the purchase of products from around the world.  Exporters, who have priority access to foreign exchange, sell their allocations to importers at inflated rates, creating a black-market for dollars that is roughly 33 percent over the official rate. Other exporters use their foreign exchange earnings to import consumer goods with high margins rather than re-investing profits in their core business.  Meanwhile, the lack of access to foreign exchange impacts the ability of American citizens living in Ethiopia to pay their taxes, or for students to pay school fees abroad.

According to data from NBE, the birr depreciated approximately 98 percent against the U.S. dollar between August 2010 and February 2018, primarily through a series of controlled steps, including a 20 percent devaluation in September 2010 and a 15 percent devaluation in October 2017.  As of March 2019, the official exchange rate was approximately 28.40 birr per dollar. The illegal parallel market exchange rate for the same time was approximately 36 per dollar with spikes up to 38 birr per dollar.

Following the 15 percent devaluation of the Ethiopian birr, the NBE increased the minimum saving interest rate from four percent to seven percent, and limited the outstanding loan growth rate in commercial banks to 16.5 percent, which limits their loan provision for businesses other than export and manufacturing sectors.  Moreover, banks were instructed to transfer 30 percent of their foreign exchange earnings to the account of NBE so the regulator can use the foreign exchange to meet the strategic needs of the country, including payments to procure petroleum and sugar, as well as to cover transportation costs of imported items.

Ethiopia’s Financial Intelligence Unit monitors suspicious currency transfers, including large transactions exceeding ETB 200,000 (roughly equivalent to U.S. reporting requirements for currency transfers exceeding USD 10,000).  Ethiopia citizens are not allowed to hold or open an account in foreign exchange. Ethiopian residents entering the country from abroad should declare their foreign currency in excess of USD 1,000 and non-residents in excess of USD 3,000. Residents are not allowed to hold foreign currency for more than 30 days after acquisition.  A maximum of ETB 1000 in cash can be carried out of the country.

Remittance Policies

Ethiopia’s Investment Proclamation allows all registered foreign investors, whether or not they receive incentives, to remit profits and dividends, principal and interest on foreign loans, and fees related to technology transfer.  Foreign investors may remit proceeds from the sale or liquidation of assets, from the transfer of shares or of partial ownership of an enterprise, and funds required for debt servicing or other international payments. The right of expatriate employees to remit their salaries is granted by NBE foreign exchange regulations.

Sovereign Wealth Funds

Ethiopia has no sovereign wealth funds.