Between 2003 and 2011, Ethiopia recorded sustained double-digit real gross domestic product (GDP) annual growth rates; after which growth peaked in 2017. In the fiscal year 2015/16, the country’s annual economic output slumped to a 12-year low (with real GDP printing at 8% year-on-year).

The output numbers could even be worse in 2022 given that growth has been negatively impacted by the conflict in the Tigrayan region. But perhaps a rather more worrying trend was recorded in the country’s external position, as the current account balance worsened to a deficit of $6.5bn in 2017 (or just about 9% of its GDP at the time).

To help reverse the situation, authorities thought the country could do with some currency devaluations, which delivered little or no harvest, and the country’s reserves have taken a hit.

For instance, in the fiscal year 2020/21, Ethiopia’s gross reserves could only cover two months of imports. That quantum, combined with a weakening foreign exchange earning capacity of the economy meant the country urgently needed to attract foreign exchange inflows. And that required taking certain bold decisions.

Hence the reforms. The latest step(s) taken by authorities is to open up domestic banking to foreign players.

‘Navigate the market’

However, when Ethiopia does open its banking sector, it will not be successful for foreign-domiciled players on day one. They would need to navigate a number of constraints in the market.

First, Ethiopia’s banking system is dominated by State-owned banks. There were 19 licensed commercial banks at the close of 2022, out of which two, namely Commercial Bank of Ethiopia and Development Bank of Ethiopia, are State-owned.

The two State-owned banks also serve as policy banks. This means their sectoral allocation of liquidity is aligned with the government’s economic growth agenda. The Ethiopian government has certain priority sectors and there seems to be a strong focus on agriculture, industrial activities, trade and infrastructure (housing, transport and communications).

The two State-owned banks appear to have aligned their lending activities to these four priority sectors. Between 2008 and 2017, lending to the four sectors accounted for 70% of the two State-owned banks’ loan books, on average terms.

Resource mobilisation

Essentially, these two juggernauts, by virtue of controlling the deposit franchise, perform the function of resource mobilisation for the government. Apart from having to battle the policy banks, Ethiopia is an inward-looking society (and largely anti-foreign). This is largely historical.

It was the only country that successfully resisted colonisation by the European powers (as best captured in the battle of Adwa). It has its own Ethiopian Orthodox calendar which has 13 months. The Ethiopian year starts on 11 or 12 September in a Gregorian leap year.

It is seven to eight years behind the Gregorian year owing to alternate calculations in determining the date of the annunciation of the birth of Jesus. The current year in Ethiopia should be 2015. A successful entry strategy requires a very localised model that incorporates local knowledge.

Any new entrant will also have to contend with the fact that Ethiopia is not a homogenous society and there are different (ethnic) groups competing for control of resources and dominance. The conflict between the Federal Government and the Tigrayans was just the tip of simmering underground tensions that will continue to play out in the future. These conflicts introduce an element of political risks to businesses which has to be factored in.