Central Bank Governor says reasoning behind Ethio-Lease’s exit is ‘Unsubstantiated’

Macroeconomic challenges, particularly a constrained foreign exchange (FX) market makes for a difficult foreign investment environment. The worry now is that further liberalization of Ethiopia’s highly state directed economy will be hampered due to continued FX shortage.

The governor of Ethiopia’s central bank has challenged the rationale provided by the nation’s sole foreign-owned financial services company for its choice to cease local operations.

Ethio Lease, an equipment leasing company and the sole foreign-owned firm in Ethiopia with a financial services license issued by the National Bank of Ethiopia, announced on Wednesday that it is in the process of concluding its operations in the East African country.

The license granted in 2019 marked a significant milestone, being the first of its kind for a foreign company, aligning with the government’s economic reforms designed to liberalize and expand the economy.

Established in 2019 with the inaugural non-domestic financial services license issued by the National Bank of Ethiopia (NBE), Ethio Lease focused on lease financing, contributing to the financing of equipment in vital sectors such as healthcare, agriculture, and construction.

Nonetheless, in its announcement of closure, Ethio Lease attributed the decision to alterations in Ethiopia’s financial regulations, specifically the requirement for lease agreements to be in birr rather than foreign currency, and the prohibition on foreign companies borrowing locally. The company contended that these changes rendered its business model unfeasible given Ethiopia’s non-convertible currency.

Ethio Lease specifically pointed to directives issued in 2021 mandating fixed payments denominated in Ethiopian birr for all lease agreements, as opposed to being set in foreign currency and payable in birr based on the exchange rate at settlement.

According to the company, a separate directive barred foreign-owned leasing firms from borrowing Ethiopian birr, making it impossible to operate as they could no longer adjust for currency fluctuations given the non-convertible birr and the absence of hedging options.

However, in a forceful response, Governor Mamo Mihretu of the NBE dismissed Ethio Lease’s assertion that changes in financial regulations rendered its business model impractical.

Macroeconomic challenges, particularly a constrained foreign exchange (FX) market makes for a difficult foreign investment environment, especially for foreign firms like Ethio-Leasing involved in importing. Even in a hypothetically frictionless regulatory environment, FX challenges will be hard to overcome. The worry now is that further liberalization of Ethiopia’s highly state directed economy will be hampered due to continued FX shortage. A financial restructuring agreement with the likes of the IMF and other bilateral lenders would go a long way in helping stabilize the currency market in the long run.

Governor Mamo refuted Ethio Lease’s reasons, asserting that the company was fully aware of borrowing policies when it made its investment.  “The company was well aware of this when making their investment decision, as also evidenced by communication on their part prior to their licensing. Therefore, the claims are baseless and unfounded. They are simply shifting blames,” Mihretu emphasized.

Mihretu contended that the NBE had supported Ethio-Lease through discussions and argued that its challenges stemmed from internal management flaws rather than regulatory issues. While expressing a desire for foreign firms to prosper, the governor maintained that companies determine whether to operate in Ethiopia.

This public disagreement highlights ongoing concerns about the regulatory environment for potential foreign investors in Ethiopia’s financial sector. Ethiopia is new to large foreign private capital investment, despite its potentially large market. Finding the right balance in regulation will take time.