The entry by foreign-owned banks and non-nationals into the financial sector has reached a point of inevitability. However, how to navigate through the web of opportunities they are hoped to bring and the risks they pose concerns many. The authorities have their blueprint; if not caution, the industry reacts with mixed feelings.
Month: November 2022
To Liberalize Finance Holy, Regulating It Is Divine
In the wake of the liberalization of the telecom sector, Ethiopian authorities have made a milestone move opening the door for foreign capital to enter the financial sector. In effect, people talk more about the prospect of foreign banks joining the domestic financial market, although the sector comprises commercial banks, insurance firms and microfinance institutions. Ironically, a policy whitepaper central bank regulators produced articulating their vision for the entry of foreign capital makes no mention of the latter two.
They seek to open the banking industry with a limited number of foreign-owned banks. Long sealed off for foreign capital, the industry will see a day of reckoning through cautious opening up, spurring the environment for further foreign direct investments. Whether banks follow capital or the other way may be a matter of curiosity. But in the Ethiopian market, overseas capital has come first through investments made by Heineken, Diego and most recently, Safaricom.
The opening of the telecom and financial sectors to foreign capital has been an ideological battleground issue for the Ethiopian state under the thumbs of the leftist political class against mounting pressure from the international liberal order. The intensity of interest was evident in many of the inquiries from countries in response to Ethiopia’s bid to join the World Trade Organization (WTO); they were about the prospect of liberalising the two sectors.
So were Prosperitarians enthusiastic about and moving fast in ravaging the walls of fear and irrational apprehension for foreign capital in finance.
Many rightfully identified the closedness of the financial sector in which there has been no foreign capital for close to six-decade, and a non-competitive market structure and strong capital controls in place. The other is the dominant place of state-owned banks such as the Commercial and Development banks. Limited accessibility, traditional products and services, meagre credit supply, and a lack of tailored products and services for households and firms have characterized the financial sector. Inadequate financial market infrastructure and limited capacity in skills have been menacing the sector.
Nonetheless, the left hegemonizing state power for five-decade dreaded private capital. More so over the three decades since the early 1990s, the left harboured profound suspicions of foreign capital in several sectors of the economy but willed to relent its grips gradually. However, whether in finance or the main economy, Ethiopia was not new to foreign capital.
The first bank that entered Ethiopia’s economic history pages was managed by the National Bank of Egypt, owned by the British. The Bank of Abyssinia – no relations with the existing bank – was formed 110 years ago with half a million pounds of authorised capital to process transactions and mint coins. Raising part of its equity in the London and Paris stock exchanges, this Bank stayed in business for a quarter of a century.
Although the Imperial government bought Egyptians out in the early 1930s, the financial sector remained open and thriving, with locals owning most of the shares in joint ventures with foreign banks. Foreign institutions owned 40pc of the Addis Ababa Bank. The subsequent decades following the nationalisation and expropriation of private wealth in the mid-1970s were dreadful for the financial sector. Although the post-1991 order revitalised finance through domestic private capital, protectionism continued.
The left feared foreign-owned banks would threaten the nourishment of viable domestic banking for they are experienced and have a reputation. The domestic financial industry is too young and inexperienced to stand up to the might of overseas banks. The entry by foreign banks would skew credit allocation towards large-scale – and primarily foreign-owned – companies in the industry, real estate and service or trade and agriculture.
Representations of foreign banks through offices helping in correspondence banking were permitted. But the recent opening for foreign nationals of Ethiopian origin and foreign investment in the capital goods leasing business could be viewed as a warming-up phase. And many continue to confuse liberalisation with deregulation, the latter about the authorities putting their regulatory hands off the sector.
The economy would benefit from financial sector liberalization, especially from the entry of foreign-owned banks and the prospect of the privatization of the state-owned Commercial Bank of Ethiopia (CBE). Opening the banking industry to foreign capital would help to enhance competition, foster a vibrant banking industry that can supply adequate finance and facilitate foreign currency generation, which would, in turn, help to upgrade international competitiveness by enterprises. It is wise to remember that it is not countries that compete but the companies and enterprises they nurture.
Foreign-owned banks will bring their expertise, network, technologies and organisational culture. They can introduce specialized banking products and marketing tools, generating positive spillover to the domestic market. They may not bring large enough foreign exchange as many would hope to boost the balance of payments. But they will generate jobs.
Liberalizing the banking industry has its way of building up the efficiency of the financial sector pushing domestic banks to compete with more efficient foreign banks. They will help improve the skills and technology levels of the industry.
Just as foreign banks come with good fortune, their arrival is not risk-free. There will be inherent risks until the regulatory and operation experiences in the sector are developed. It is here where the capacity and competence of the regulatory agency count.
Rightfully, central bank authorities worry that exposure to external shocks, foreign ownership concentration, cut-and-run during financial troubles and supervisory challenges are possible risks to face when foreign banks enter the domestic market.
They should work diligently to enhance their regulatory and supervisory capacity, implementing fair policy safeguards.
The challenges coming from the industry upon entry of foreign-owned banks with more sophisticated products and services may force the National Bank of Ethiopia (NBE) to upgrade its regulatory framework and supervisory capacity. Given the role and responsibilities its regulators have, it should not be surprising to observe a broader consensus on the importance of a strong and autonomous central bank.
The sense of autonomy does not mean that a central bank should not be accountable. It includes to beholden to lawmakers and the general public. While it is essential not to be partisan in power politics, regulators should be sensitive and aware of the broad social, political, and economic context within which monetary policies are conducted. Accountability is a test of public support that sends a clear signal through the financial markets when the public is unhappy with monetary policy objectives and implementations.
The need for a competent central bank can be characterized by high-quality professional staff and governors who are bold and courageous in making decisions unpopular in the eyes of the political establishment. Recruiting and retaining the best people, building a career-based organization, providing a competitive salary structure and a conducive environment should be their priorities. It would become vital to design a substantial policy shift allowing and regulating a financial sector with foreign capital involved in transforming the industries.
Truculent Foreign Banks, Fragile Industry, Bullish Central Bank
Zemedeneh Negatu, an investment consultant, had his team approached by boards of directors and senior executives of 10 private banks a few months ago. For two decades, he made his name working as a partner for Ernst & Young, one of the four global accounting firms based in London. Leaving the firm five years ago, he chairs Fairfax Africa Fund, a Virginia-based transaction advisory service contracted by state-owned companies such as Ethiopian Electric Power (EEP).
Zemedeneh believes the government wants to see a small number of banks with a competitive position.
“I expect five large commercial banks to emerge within the next year and a half,” he told Fortune.
His presentations to the directors and executives reflected this view, conveying that domestic banks should prepare for mergers he sees will be inevitable. It is a conviction prompted by the prospect of foreign-owned banks entering the Ethiopian financial sector, following a policy decision by the Council of Ministers to let them have a presence after almost six decades of proscription. The authorities’ move ended an ideological battle over foreign capital’s role in the financial sector, fiercely fought for over two decades.
Apprehension prevails among shareholders and executives of domestic banks after years of preaching the idea of liberalising the sector, which remains stunted and fragile. Finance pundits argued for long that liberalising the sector enhances competition and encourages technology transfer enabling more resource mobilisation. Zemedeneh has been one of the vocal voices pushing for foreign nationals, including himself, to be allowed an opportunity to invest in the financial sector.
Through mergers and partnering with foreign banks, Zemedeneh and his team projected Ethiopia could have one or two top 25-ranking private banks in the continent. According to the African Business Magazine ranking, the only domestic private bank that has made it to the top 100 largest African banks is Awash Bank, which is at 91st.
This would not be the country’s first to open its financial sector for international capital. Foreign nationals had invested in private banks since the 1930s. The first financial institution, the Bank of Abyssinia, was managed by the Bank of Egypt on a 50-year concession. The reform in 1963 allowed foreign capital involvement so long as the stake did not exceed 40pc; until the nationalisation and expropriations of private capital in 1975, which established a mono-commercial banking system, the domestic financial sector thrived, benefiting from foreign capital.
In the mid-1990s, the EPRDF regime reformed the sector, allowing domestic private investment while completely shutting out foreign banks.
For more than a decade, policymakers have been under intense pressure to consider the idea of their return. The much-debated dilemma of opening up was finally decided following the ascent to the office of Prime Minister Abiy Ahmed in 2018. Regulators at the National Bank of Ethiopia (NBE) are putting the final touches to amend the law governing the banking business, last revised in 2008.
They put out a white policy paper envisioning four modalities for the involvement of foreign banks and nationals: a subsidiary, a branch, a licensed representative office or acquiring shares of existing or newly established domestic banks.
Subsidiaries are separate legal entities, partially or wholly owned by a parent bank, which will sign undertakings to ensure the solvency of its subsidiary operations here. Equity investment is allowed up to five percent by a nonbank foreign national, up to 30pc by a foreign bank and up to 40pc by aggregate foreign investment. Branch offices of foreign banks could be opened. Foreign banks’ representative offices could be opened to conduct market research, provide advice and facilitate trade financing and investment.
The authorities hope to see the policy move to help import banking skills, specialised state-of-the-art products and services to the financial sector. But they expect to see all but three to five foreign banks enter the market.
Kenya Commercial Bank, with a 1.2 billion dollar capital and a 302 million dollar in net profit, is a financial services provider headquartered in Nairobi. The Bank is among the foreign companies interested in investing. One of the leading private banks in Kenya, Prime Bank Ltd, is also eyeing to join the industry. Serving its customers for over 30 years, securing 233 million dollars in gross and 29 million dollars in net profit, the company has been in business for more than 30 years.
The reaction to the prospect of opening up is mixed.
“Only regional and sub-regional companies have shown interest,” said Shibeshi Betemariam, secretary general of the Addis Abeba Chamber of Commerce & Sectoral Association. “The country hasn’t much to fear.”
No less than 15 CEOs of banks were present at a panel the Chamber recently hosted, including from Ahadu, Dashen, and Hibret banks. It was one of the rare episodes drawing a large herd of senior executives to a room, culminating in a position paper articulating their concerns on implementation and strategies. Submitted to the central bank two weeks ago, it is a voice that could represent the concerns of almost half a million shareholders who have mobilised aggregate equity for the 28 private banks reaching 103 billion Br.
Millions of people need access to credit, primarily through medium and small enterprises. However, only nearly 300,000 individuals had access to a loan out of 120 million people.
Fikadu Petros, a lawyer and financial consultant, is one of these shareholders who attended the panel organised by the metropolitan Chamber. He sees the decision to allow foreign-owned banks entry into the domestic market as the glass half-full. He believes they can bring opportunities. But he also worries that rapid implementation poses a risk, particularly to the third-generation banks that have entered the industry in recent years.
Ahadu Bank is one of these banks joining the industry this year. It was one of half a dozen at the cusp of entering the market, meeting the minimum capital threshold requirement of half a billion Birr in six months, growing its paid-up capital to 680 million Br. Its President, Eshetu Fantaye, aspires to raise two billion Birr in a year, subscribed by 10,000 shareholders.
It will be an uphill task. The industry is moving into a fierce battleground for equity from the public, where many of the older private banks are raising their capital three to five folds.
Ahadu has been focused on digitising its operation from the start. However, preparing for foreign banks’ entry takes more than digitalising an industry or reaching a certain threshold in paid-up capital.
Eshetu fears that subsidiary and branch openings will give space to foreign banks to compete aggressively, affecting domestic banks struggling to stay competitive. He hopes for a gradual onset of the industry.
“We don’t see their entry as a threat, though,” he said.
The central bank wants to encourage post-entry mergers if competition becomes stiff. However, Eshetu feels no need for a post or pre-merger from their side.
“We plan on growing profits in the next two years,” he told Fortune. “Undoubtedly!”
Veterans in the industry, such as Hibret Bank, attest that they formulated a strategy as early as three years ago. Hibret reported a positive result from its operation last year, registering a gross profit of 1.8 billion Br while raising its paid-up capital to 4.3 billion Br, growing by 1.5 billion Br. Its shareholders have decided recently to beef up the Bank’s capital base by four-fold in the next five years, raising 7.5 billion Br from shareholders and another 7.5 billion Br floated to the public.
Melaku Kebede, Hibret Bank’s president, is on the same page with Eshetu in seeing the entry of foreign capital as an opportunity and not a threat. Speaking at the panel organised by the Chamber, Melaku preferred to see a phased entry of foreign-owned banks through acquisitions. However, the post-entry merger could be an appealing offer, according to Melaku.
“Hibret Bank is willing to merge with other banks whose portfolios and business strategies align with it,” he told Fortune.
The industry lacks consensus on merger as a viable strategy to cushion the impact of competition from foreign-owned banks.
Bekalu Zeleke, president of the Bank of Abyssinia, a first generation private bank, would see consolidation through merger only if the central bank decides to increase the threshold capital larger than what it set for 2026.
He sees more challenge coming from the convergence of telecom, technology and finance.
“We see Safaricom as a challenge more than the foreign banks,” he told Fortune. “We plan on continuing on our own; the decision to merge will have to come from shareholders.”
Other CEOs, like Asfaw Alemu, prefer to see foreign-owned banks pushed to take the road of acquisitions as a viable entry to the industry. Although he sees an opportunity ahead, he questions if this is the right time, as several economic woes have hit the industry and the main economy.
A growing budget deficit, the balance of payment crisis, erosion of the Birr against other currencies, and high and persistent inflation are wreaking havoc.
“We question the timing,” Asfaw told Fortune.
For Asfaw, a phased entry is better than making all modalities open simultaneously. The policy suggests that a single foreign bank, as a strategic investor, may own a share of up to 30pc in an existing or new local bank. Dashen, the second most profitable private commercial bank having its shareholders agree to double their capital to 12 billion Br in the next three years, sees equity as beneficial.
Zemedeneh, too, is in favour of the acquisition modality, urging banks to sell shares of up to 30pc to foreign-owned banks or non-nationals. The Chamber also recommends a strategic partnership with foreign-owned banks, and its leaders are convinced that it involves lower risk than subsidiaries or branches.
“The first step is a stock exchange through strategic partnership,” Shibeshi told Fortune. “Subsidiaries should come after the partnerships, allowing the country to adapt to foreign banks.”
These concerns by the industry leaders and leaders of the private sector seem to have ears from the regulators. Regulators try to assure them that there will be limited entry and doors will not be opened as widely in the next five years as it is feared. Nonetheless, the central bank does not wish to change the four modalities.
“All the four modalities are to remain open,” Vice Governor Solomon Desta, who also serves as the central bank’s chief economist, told Fortune.
Unlike many experts and bankers, Tadele Ferede, an assistant professor of economics at the School of Economics of Addis Ababa University, does not see the entry modalities as a threat to local banks.
“It’s not the ‘how’ we should focus on but the ‘what’,” he argued.
The central bank has forewarned local banks to strategise for foreign banks’ entry, but no more than two banks have submitted enquiries. According to Yoseph Getachew, a finance and investment consultant and CEO of RiseAddis Advisory, many were slacking off and bound to face the consequences.
Yoseph has done several research on the finance sector, including foreign banks, after his undergraduate degree in economics and a graduate degree in business administration. He believes that fully opening the sector is the best way to go, as it has been protected with little to show and needs to take some risks.
“Some might get hurt in the process,” he told Fortune. “So be it.”
Yoseph is not against the idea of mergers the Chamber promotes forcefully, and Zemedeneh enthusiastically advocates. He does not see an impact in attaining a competitive and robust industry through this path. He believes a merger works when a bank offers something the other lacks.
“You can’t join two similar things and expect something great,” he said.
Tadele concurs. He sees the financial sector far behind compared to other countries, lacking dynamism and providing more or less similar products and services everywhere.
“The difference only lies in ownership,” Tadele said.
The financial sector lacks a bank that can be a role model in technology, product diversification, customer services and efficiency. Allowing foreign banks could unleash the growth potentials of domestic banks as competition helps the sector pull itself out of its languid state. He praised Ethio telecom’s expansion after Safaricom entered the domestic telecom market.
“Ethiotelecom has expanded immeasurably since then,” said Tadele.
Zemedeneh believes that a bank needs a big balance sheet to invest in human capital, improve customer services, and acquire new technologies, emphasising the idea of a merger.
“It’ll never work by raising two and three billion Birr here and there,” he said.
He foresees a stock market launched in two years where five consolidated banks could expand their capital base, sell shares to the public and become competitive in the international market. Central bank’s white paper also recommends acquisitions, sheltering younger and fragile banks from complete decimation.
“The strong should help the weak and grow their paid-up capital much higher,” Shibeshi of the Chamber said. “Five billion Birr capital is nothing to foreign banks.”
“We’re preparing a directive for mergers,” the Vice Governor disclosed to Fortune.
Only three banks – Awash, Abyssinia and Dashen – have surpassed the minimum capital threshold of five billion Birr the central bank set with a deadline in three years.
Industry players and insiders are concerned about the central bank’s capability to govern an industry that will see foreign-owned banks active in the domestic market. They urge policymakers to separate the regulator role for microfinance institutions, insurance and fin-tech companies from the NBE, letting the central bank focus on its monetary policy roles.
The central bank is forming a separate governing institution for insurance companies, micro-finance institutions, and fin-techs to focus on monitoring banks primarily. It believes this is one way to increase its capacity to regulate and supervise foreign capital.
According to Tadele, what the central bank needs to do first is improve its lot. It needs to take lessons from other countries on how their national banks leveraged to bring various structural transformations. He believes the policy to open the financial sector to international competition misses an emphasis on whether foreign-owned banks would be allowed to do all banking activities or limit their operations to selected services.
“This requires enacting a legal framework to limit their services for a specific period,” said Tadele. “Experience elsewhere has shown the advantage of this approach.”
He wants to see foreign-owned banks focus on facilitating the export and import of critical capital goods. The other specialised operation offers long-term finance, allowing domestic banks to make adjustments.
“Provision of long-term finance is what the country needs,” Tadele said.
The experts agree on three things to consider while liberalising the financial sector: customers, shareholders and the industry.
“Customers require competition,” said Yoseph. “They need and deserve better services.”
Secretary General of the Ethiopian Bankers’ Association, Demsew Kassa, does not see any concern here. However, authorities have overlooked that foreign banks are not coming for charity. They will be here looking for opportunities for themselves.
Liberalising the financial sector is feared to harm the banking industry as local banks are too young and underdeveloped to compete with advanced foreign banks. At the same time, NBE’s requirement to not let more than four branches of foreign banks in the sector does not shine a light on improving economic growth.
“It’s unlikely they will do anything withstanding and worthy with only four branches,” Demesew said.
Repay Homebuyers: Judge Orders Access, Pacific Link Real Estates
Hundreds of homebuyers signed up for deals with Access Real Estate to buy properties under Pacific Link Ethiopia Real Estate should be paid compensation for homes undelivered, a Judge at the Federal High Court ruled.
Disgruntled homebuyers filed civil suits against the developers, claiming reimbursements of the money paid along with interests and punitive damages. Some buyers paid the full prices of the houses sold by Access Real Estate and Pacific Link, the latter 40pc owned by Access.
Judge Yihenew Kelil ordered that close to 170 of these buyers be reimbursed for the advance payments, expenses incurred during litigations, and interests. The interest is calculated according to the contracts the developers and buyers made. In most cases, interest rates involving legal matters go over 12pc, but if nothing is stated in the contract, the Judge can decide on a nine percent, according to Arba Beyene, a legal expert who worked in a land management bureau for over three years.
Judge Yihenew ordered the companies to settle 1.9 million Br in legal expenses.
The ruling was made a month ago, eight years after buyers took their case to court, accusing Ermias Amelga, the main promoter, in absentia.
Pacific Link had planned to build seven-storey luxury apartments, Ayat Eastview, on a 50,000Sqm plot, past the Ayat neighbourhood. Its managers had promised to complete and deliver homes in two years, beginning in 2011. Pacific Link had contracted Access Real Estate to build the houses; Access had collected 1.4 billion Br from buyers within a few years of its incorporation.
The plaintiffs appealed that each contract signed with Access Real Estate be nullified and refunded.
Pacific Link Real Estate was involved in the same case in 2013. Close to 137 aggrieved homebuyers brought charges against the company, claiming 73.4 million Br in punitive damages for failing to deliver homes.
First incorporated in 2007 with paid-up capital of 50,000 Br, Ermias was a significant shareholder of Access Real Estate with a 92pc stake. Four other shareholders contributed equity of 1,000 Br, before the company went public, mobilising 35 million Br in equity from 640 shareholders. It faced multiple civil suits brought against it and its subsidiaries over the decade.
Access Real Estates’ downhill slide escalated after its CEO, Ermias, was arrested for issuing a cheque without sufficient funds in the company’s account, forcing him to leave the country in 2014. This led to homebuyers rushing to the Access Real Estate offices, demanding their money back.
Amidst this trouble, homebuyers from each site organised themselves into committees to decide how to recover their costs.
Azeb Worku, an artist and TV personality, paid 1.5 million Br for an apartment planned on African Avenue (Bole Road), on a site behind Mega Building.
“The company has tricked many,” said Azeb.
Homebuyers were offered a contract on a plot that Access did not own, according to Azeb. Buyers demanded the plot be transferred to them and build the property on their own.
Dawit Tewolde is one of the 167 plaintiffs who formed an association to follow the case for the past eight years.
“Finally, we won,” he told Fortune.
Aklok Seyoum is a board member of the Access Real Estate Homebuyers Association, formed in 2012 by over 2,000 members. The Board has brought the case to former Prime Minister Hailemariam Desalegn. An intra-agency committee comprised of members from ministries of Urban Development, Housing & Construction, Foreign Affairs and Trade, as well as the Federal Police Commission, the Addis Abeba City Justice Bureau, the Mayor’s Office, and the homebuyers association had been formed to probe the case.
“Many frauds were committed,” said Aklok.
Ermias says Access Real Estate’s Board could not perform properly because there was a management problem due to the governmental structure at the time.
“This is not new,” Ermias told Fortune. “The company had such cases for a long time.”
Mayor Adanech Abebie has announced that her administration has reclaimed title deeds for 90hct land from 68 developers who had not developed the plots in over a decade since 2006. Pacific Link is among these developers.
Pacific Link’s significant shareholders, Addis Ayele and Nebyou Samuel, were unavailable for comment.
City Finance Bureau Blocks 28b Br Mega Project
The Addis Abeba Finance Bureau blocked a multi-billion Birr budget the city administration approved after requests to pay bid winners in foreign currency gets rejected.
Under Debo Tunka, the Addis Abeba City Administration Mega Project Construction Office asked the Finance Bureau for feedback as the term of reference in the bid documents demands a foreign currency payment of 20pc. However, the Bureau responded that giving approval for payments in foreign currency is the central bank’s mandate.
The bureau is willing to revise its decision once the payment terms are changed.
Officials of the Bureau were not pleased to see a strain on the city administration’s budget when the Mega Project Office paid 80pc in foreign currency for renovating the municipality complex up Churchill Road, housing the Mayor’s Office.
“The Finance Bureau was disbursing from the annual budget,” said Mebratu Gebre, budget office director.
The renovation, costing taxpayers 2.2 billion Br, facelifted the complex for the first time in 57 years. It was constructed during the reign of Emperor Haileselassie, designed by an Italian architect Arturo Mezzedimi and constructed by the Italian firm ESBU Construction. The iconic structure was renovated by ALEC Engineering & Contracting LLC, a Dubai-based company that also restored the Prime Minister’s Office.
The Mega Project Office, established to oversee public projects costing over a billion Birr, was awaiting the green light from the Finance Bureau to enter into a contract to award a sectoral office district. To be administered under the Public Property Administration Authority, the office project will house 38 bureaus in the same location, making them accessible for residents across the city to get various administrative services.
The construction will be erected on 11.5hct of land on Tessema Aba Kemaw Street, adjacent to Tekelehaymanot Church, to be completed in three years.
Abinet Belay, an investment consultant for MPE Consult, questions the feasibility and timing of spending a large amount of money on extravagant office facilities when there are budget deficits not only in the city but at the federal level.
“I would advise them to see other areas that can generate revenues,” said Abinet.
The Project would have four lots, and the construction firms winning the bids would design and build the offices.
The office cluster was initially planned to be constructed on a plot adjacent to the Ethiopian Management Institute, across Sahlite Meheret Church, on the road between Megegnaga and Ayat. The first lot awarded to the China Communication Construction Corporation for close to 29.9 billion Br was scrapped. China Jiangsu International Economic & Technical Limited took the second lot for 8.8 billion Br. The remaining two lots were awarded to China Civil Engineering Construction Corporation Ltd, with a total value of 19.2 billion Br, making the total project cost 28 billion Br.
The Addis Ababa City Administration approved a 100 billion Br budget for the current fiscal year, while 7.1 billion Br was appropriated for the mega projects. However, three mega project construction contracts valued at over 30 billion Br have been awarded to contractors this year. They include cluster zone (7.7 billion Br), agricultural produces market (six billion Birr) and sectoral office projects.
Despite the delay in implementation, the project news is eagerly awaited by thousands of employees under the city’s administration dispersed and cramped in several offices. According to Paulos Birhanu, deputy head of the Addis Abeba Public Property Administration Authority, the city administration has been spending over one billion Birr annually for office rentals.
“It’s aimed at saving rental expenses,” said Paulos.
It is also hoped to create better work environments for those working in uncomfortable spaces settled in areas inconvenient to city residents.
The Addis Abeba Trade Bureau is one of 38 administrative offices that will be shuffled into the sectoral district. It provides service housed on five floors at the Arada Building near General de Gaulle Square. Over 200 staff provide trade license registration and renewal services for more than 60,000 businesses.
“During pick seasons, 100 clients on average visit the office,” said Daniel Ligosa, the Bureau’s communications director.
The absence of parking lots and discomfort in waiting areas are among the complaints Daniel encounter in his daily routine.
The same is true for the city’s Health Bureau, which pays 1.8 million Br monthly rent for the eight-storey building in the Megenagna area.
According to Seife Demisse, head of equipment supply, the building was constructed for a hotel, and changing the rooms to office purposes has been challenging.
“We work here because we have no other option,” he told Fortune.
The inadequate rooms for more than 300 staff forced the Bureau to share one office for close to 10.
With Improved Seeds Local Farmers Offer Promise to Cover Imported Barley
Assela town, 126Km south of Addis Abeba in the Oromia Regional State, may have a reputation for nurturing world track-star athletes.
It is also a prominent barley producer region, with the quality highly sought by the brewery industry. Of the one million hectares of barley harvested, 20pc is used for malt production; the vast plain land in the Assela area generates much of this.
“It’s such a blessed land,” said Jean-Benoit VIVIT, head of Soufflet, a french company that opened a malt factory in Ethiopia in 2017.
Vivit is proud of the wonders seeds supplied by his company have done and looks forward to a more enriching partnership with brewers and competing companies in the malt processing industry.
Gonder and Assela malt factories are working with GIZ, the German development agency, to substitute the barley used to produce malt with the domestic market. Boort Malt has been sourcing all its demands, valued at 800 million Br, from local farmers for the last three years.
The Assela Malt Factory is the leading malt supplier, established 40 years ago. Close to 2.2 million quintals of barley are processed annually, giving hope that domestic brewers will stop importing malt barely in the coming year. Farmers around Assela began to cover 90pc of the source last year, a result of cumulative effort exerted by the beverage industry.
The Gonder Malt Factory processes an annual 230,000Qtl of barley. According to the Chief Executive Officer (CEO), Tadesse Kassahun, over 90pc of the barley processed by his factory is sourced from farmers in the Oromia and Amhara regional states. It was on the verge of halting production eight years ago due to supply shortages if it was not for imports.
Ethiopia imported barley from Belgium and France two years ago for 2.45 million dollars annually. The skyrocketing import bills since have put a strain on breweries with low malt barley production. Studies projected the import bill for malt will balloon to 420 million by 2025.
Traditional methods of farming and seeds yielding low harvest used in previous years led to insufficient production that put farmers in a dilemma between keeping the harvest for consumption and sourcing it for the factories. The supply from local farmers was up to half a million quintals.
Zewdie Bishaw and Adamu Mulla researched barely farming and published a book for ICARDA, an international organisation. They believe farmers can meet growing domestic demand and reduce imports with a favourable environment and improved technologies. According to the researchers, farmers can grow malt barley cost-effectively and improve their livelihoods through increased income.
Heineken and Dashen breweries, in partnership with Gonder Malt Factory, have been working on a project to raise harvest with 35,000 farmers in Amhara Regional State. GIZ financially supported the project with a grant of nearly one million euros.
Heineken has also partnered with the Oromia Agricultural Transformation Institute and GIZ since 2013, providing 7.5 million dollars in financial support for farmers in the outskirts of Assela. The project is designed to benefit 70,000 farmers who could fully cover the demand from the beer industry.
Sisay Mekasha is one of these farmers recognised as a role model for other farmers in his village. He used to produce 10Qnt to 20Qnt of barley on a hectare of land and supply the Asella Malt Factory with 500 Br for a quintal. Although he has 12hct of land, sending children to school and sustaining the family was a struggle.
However, his harvest was increased three-fold after substituting seeds, on sale for 4,000 Br. His income ballooned, selling his barley for 5,000 Br.
“We’ve been introduced to varieties of barley crops,” Sisay told Fortune. “Barley has become our coffee and gold.”
The French company, SUOFFLET, supplied these seeds dubbed “Traveller”, “Fatima”, and “Grace” to these local farmers with help from the European Cooperative for Rural Development (EUCORD).
EUCORD, through its BOOST project, works on improving farmers’ barley production by increasing access to improved seed varieties.
The Traveller seed goes well with the soil in the area, with farmers preferring it better.
The Institute helped the project by providing land for production, locating the farmers, and cooperating with studies and research. It is working to improve production further through training and introducing effective products. The Head of the Institute, Abebe Deriba, is pleased to see improvement in farmers’ life. He described the partnership between Heineken, Soufflet and EUCORD as a game-changer.
Mega Haji has been on the Heineken project for over eight years. He sends his children to private schools; he attributes the changes in his living standard to the Traveller seed.
The malt barley projects have earned a reputation by securing local sourcing of raw materials for food and beverage industries, engaging large numbers of smallholder farmers. Heineken Ethiopia has been awarded for these activities.
“Soufflet and ATI have played a major role in this global award,” said Antenh Mitiku, director of supply chains at the Heineken Breweries.
Heineken has been working in the Oromia region to boost barley production since 2013, which helped substitute 90pc of imports of malt barley.
Dashen Stands Tall Amid Industry Peers
Dashen Bank continued to tower as the industry’s top performer judging by its latest financial reports released two weeks ago, despite losses from forex dealing remaining stubborn.
Addressing shareholders who met at the Sheraton Addis recently, the Bank’s President, Asfaw Alemu, described the operating year as “another successful year.” Experts concur.
“The performance is awe-inspiring,” acknowledged Abdulmenan Mohammed, a financial statement analyst based in London who keenly follows the domestic financial sector. “Shareholders should be delighted.”
The Bank delivered exciting news to shareholders doubling earnings per share (EPS), one of the highest in the industry. At 532 Br, the EPS is almost double last year’s industry average. The marked increase in interest and fees, commission income, and reduction in foreign exchange loss contributed to Dashen Bank’s net profit, 2.9 billion Br, significantly improved by 68.3pc from the previous year, compared to the preceding year’s 12pc.
Its paid-up capital upsurged by 56.3pc to 6.86 billion Br, following shareholders’ decision to inject 2.5 billion Br in fresh equity. This has positioned Dashen Bank to exceed the minimum capital threshold the central bank imposed on commercial banks in four years.
Shareholders have passed a resolution to further raise Dashen’s capital to 12 billion Br before the deadline in 2026.
“We witness the growing number of new entrants into the market, expected to intensify competition,” says Dulla Mekonnen, chairman of the board.
Not all was sinecure for one of the five largest private commercial banks in business for over a quarter of a century. Dashen continued to face enormous losses in foreign exchange dealings for three consecutive years, although the loss has dropped to 681 million Br from 1.04 billion Br from the previous year.
The decline in remittance flow through traditional money transfers such as Western Union and Money Gram is due to the enormous gaps between the official rate and the parallel market offers, says Yitagesu Ayalew, a branch manager around the Stadium area one of the 582 branches of Dashen Bank. It opened 128 additional branches last year, eight in the capital.
Although Yitagesu is pleased with the Bank’s overall performance, particularly in deposit mobilisation and profit earnings, he observed a decline in the number of exporters at his branch following the central bank’s decision to raise the forex surrender rate to 70pc.
The Bank’s President is aware of the significance of the loss due to the depreciation of the Birr against a basket of major currencies.
“We’ll work to manage it,” he told Fortune.
Asfaw and his executives will have to work to boost loans and advances, including interest-free credits, which registered an increase of 23.9pc to 79.2 billion Br. This amount exceeds last year’s industry average of private banks by 37 million Br. Deposit, too, grew by 22.4pc, upsurging to 91.24 billion Br, pushing loan to deposit ratio to 86.8pc, expanding by 1.1 percentage points from the previous year. The ratio is lower by three percentage points from what regulators put as a cap.
Dashen Bank has achieved more than double of average deposits of private banks recorded last year.
However, Abdulmenan cautions executives of the Bank to be mindful of further increases in the ratio as it could cause a liquidity crunch. Dashen Bank’s liquid to total assets ratio increased by three percent, after cash, bank balances and reserve increased by 52.1pc to 16.9 billion Br. The interest paid on deposits grew by 14.9pc to 3.4 billion Br. Compared to the growth of deposits, the increase in interest expense is deemed reasonable.
Total assets soared, showing 23.7pc growth to 117.14 billion Br.
Dashen Bank’s interest on loans and advances and the treasury bills it purchased from the central bank grew by 23.7pc to 9.85 billion Br. Fees and commissions jumped by 32.8pc to 2.55 billion Br.
Abdulmenan sees a “remarkable” increase in lending activities that drive growth.
Asfaw observed the banking industry had faced numerous challenges in the reported year. Central bank’s tight monetary measures led to the industry surrendering two-thirds of foreign exchange earnings, an increase in the reserve requirement to seven percent, and the newly introduced requirement for banks to invest one percent of their outstanding loans in DBE bonds.
Dashen’s provision for doubtful loans and other assets rose to 270 million Br from 254.1 million Br. According to Abdulmenan, the figure in recent years requires serious attention from the Bank.
The President argues that provisions stood at a healthy amount. He disclosed the Bank raised provision amounts for loans disbursed in conflict areas.
Yitagisu also agrees that instability in the northern part of the country somehow affected the Banks’ performance.
Canadian Firm Completes Feasibility Studies on Railway to Port Sudan
A railway line from Addis Abeba to a Sudanese port is afoot under the two governments after a Canadian consulting firm completed a feasibility study.
Pacific Consulting Services, which won the bid for consultancy services for close to 1.2 million dollars, has submitted the study for a project covering 1,522Km, with 918Km confounded in Sudan. The African Development Fund has provided the finance to pay the consultant. The initial finance for the study was granted from NEPAD-Infrastructure Project Preparation Facility (NEPAD-IPPF).
The Ethio-Sudan railway project is part of the far-fetched Lamu Port Southern Sudan Ethiopia Transport (LAPPSET) corridor development. It is expected to connect the two countries with Kenya in logistics and transport. The development of Lamu Port, a standard gauge railway line between Port Sudan and Addis Abeba, three airports, port cities, an oil refinery and multiple road networks are all part of this ambitious project.
The LAPPSET project was conceived in 1975, and the Kenyans revived it in the 2000s. The total completion cost is estimated to reach 40 billion dollars if it is realised by 2045. The China Communications Constructions Company broke ground on the development of the Lamu Port in 2012, which will have 32 berths, with three beginning operation last May.
Ethiopian and Sudanese authorities requested the African Development Bank (AfDB) for financial assistance in 2016.
The two countries have signed multiple bilateral agreements, the most vital being Ethiopia’s utilisation of the Sudan port. In 2018 an agreement was reached that the Ethiopian Railway Corporation (ERC) would be the executing agency with the railway route passing through Addis Ababa- Gonder-Galabat-Haiya to Port Sudan.
The Corporation is a state-owned enterprise established in 2007 to manage a national railway network with access to neighbouring countries.
Kassahun Abberu (PhD), general manager of Akakas Logistics Plc, does not mind seeing the construction of a railway track. However, he believes the layout should consider the resource base and industry concentration along the track lines.
“The critical element is voluminous inter-linkage of the industry, not an extension of railway tracks,” he told Fortune.
The French built Ethiopia’s first railway beginning in 1897, a narrow gauge railway connecting Ethiopia and Djibouti. The Ministry of Transport & Logistics has recently revealed a 30-year strategic road map called ETMP50, which includes several road and railway projects.
The expert recalled other large-scale transport initiatives, like a road from Cairo to Cape Town in the 1970s, which remains on the drawing board. A railway must enhance trade linkages if it is to cover borrowing costs. The last successful railway track was finished in 2018, and the Ethio-Djbouti track was built with a 2.5 billion dollars loan from the Chinese Exim Bank.
The Hara-Gebeya Awash Woldia project, another mega railway track, was under construction stretching 390Km, before the war in the north. Contracted to the Turkish construction firm, Yapi Merkezi, the project had been nearing completion at a budget of 1.7 billion dollars when the war broke out.
It was financed by a combination of the Turkish Exim Bank and a consortium of European financiers, including Credit Suisse, a global investment bank that manages over 1.5 trillion dollars in assets based in Switzerland.
The Corporation’s communications head, Abebech Driba, said the project is in limbo, with an assessment of the track damage yet to be made.
Pacific Consulting was not available for comment on this story. Neither was the AfDB responsive to emailed questions from Fortune.
Digital Driving License Becomes Trans-National IDs
Drivers residing in Addis Abeba will be issued digital licences in the coming year, also serving as transboundary identification cards with microchips storing data on driving history.
An overhaul of the transport and traffic management system, dubbed “Traffic Transport Management System (TTMS),” was initiated with 84 million dollars funded by the World Bank. It is part of a 300 million dollar fund the Bank approved six years ago to finance the Transport Systems Improvement Project Office, managed by Bahru Mossa, who reports to Dagmawit Moges, minister of Transport & Logistics (MoTL).
The project aims to reduce traffic accidents by digitising the system and integrating vehicle and driver data under the tripartite transit and transport facilitation program (TTTFP). Ethiopia is a signatory to the program, an agreement between countries of the Common Market for Eastern & South Africa (COMESA), the South African Development Community (SADC) and the East African Community (EAC).
The Sub-Saharan transport program includes 26 African countries and aims to harmonise cross-border travel. It initially received 18 million euros from the European Union at the end of 2019. The standard of vehicle registration will be harmonised between member countries while enforcing rules at cross-border corridors.
The new driving licence regime will require biometric data such as fingerprints and facial recognition features.
The traffic transport management system will register vehicle numbers to make the car’s weight against the roads’ capacity across member states as cars enter borders. Vehicles will be identified with a backlog of weight, accident history, penalties and insurance claims that other member states can access beginning the first quarter of 2023.
Director of the Federal Transport Management Training Institute, Ablolom Weldemariam, believes the new regime will address the problem of widespread forgery in driver’s licenses.
The registration begins when individuals go to driving schools to get a licence with a unique marker encoded onto microchips attached to the cards assigned to each student. The initial stage will store the hours in driving schools and test scores, including drivers’ data. Data on penalties, accident history and vehicles registered under the individual after licences are issued will be recorded.
Debebe Tenaw has been a manager at the Safety Driving School, one of the 103 driving centres in business for nearly two decades. He applauded the infusion of technology into the transport system but warned against it becoming another tool of corruption. The camera malfunctions force the examination date of students to be postponed for up to six months, only to be delivered with bribes, he claimed.
“I’m tired of hearing ‘there is no system’ excuses,” he told Fortune.
Debebe believes the project should start from the regional states and make its way to the capital, claiming most falsified licences originate from regional towns.
Digitisation deprives corrupt officials of room to exploit their positions of power, according to the computer science lecturer Henok Ephrem. The founder of the software company, Tontetor Plc, Henok welcomed the news, arguing that the benefits of such a system trump privacy concerns.
Data collected through the system will be fed into the national ID as part of the digital strategy. Traffic police officers can access drivers’ data from a smartphone or laptop.
“The days when the traffic officer pulls down his glasses to match the driver to the picture will be over,” said Bahru.
The idea also floated nicely to Birhanu Kuma, communications head of the Addis Abeba Traffic Management Bureau. He believes that the system ultimately helps to lower road traffic accidents. With Ethiopia ranking 19th globally in car fatalities, according to this year’s WHO report, a decline in the number of ill-trained drivers on the roads would be a positive development.
Dejene Luche is president of the Ethiopian Transport Employers’ Federation, a lobby group for cross-border vehicles with 350 members.
“We’re asked to pay as much as 1.3 million Br for crane services when our cars break down in Djibouti,” he said.
The Federation welcomes any manner of implementing an integrated cross-border driving management system, according to Dejene. However, he stresses that laws across regional states are not enforced, let alone across borders.
Trending Rule of Law to Shape a Better Attitude
Rule by law and the rule of law are mutually exclusive terms. Using them synonymously is getting blurred in our society. Defining the terms is one thing but labelling the community against their will is another. A society that abides by the rule of law requires a modern society with a modern attitude.
The concept of rule by law sees the governing authority as being above the law and having the power to create and execute law when convenient. It is a method power uses to shape individuals’ behaviour when governing. Its end is psychologically or forcefully persuading citizens to agree with policy decisions. Democracy goes down like a lead balloon as it takes force to shove things down peoples’ throats.
The rule of law is an intrinsically abstract idea grounded in philosophical and moral conceptions. Everyone is equal before the law, whether at the lowest level of citizenship or those taking levers of a sovereign state. Everyone should be treated fairly and justly, and power is not exercised arbitrarily or with impunity. Democracy flourishes because the governing body built institutional legacies or values and has been able to shape society.
Which one of the philosophical ideologies used in our country is a question that needs an answer.
I see government officials and the public using the terms as one and associating them with stakeholders in the public policy arena. These are individuals or groups engaged in organisational affairs, such as politicians and regulatory agencies. The confusion can be addressed by building robust institutions that essentially strengthen the rule of law.
We first need to focus on strengthening public attitudes, not institutions. This involves the difficult, dangerous and often unglamorous work of mobilising at the grassroots. Empowering citizens to act through informal channels outside established institutions and educating and training initiatives could improve the public’s understanding.
Such efforts are vital for states where institutions are fundamentally broken. In established democracies, the failure in the country of supposedly strong institutions to prevent the rule of law from being undermined has shown that there is no substitute for active and organised citizens. Such engagement cannot be legislated, decreed, or copied and pasted from another jurisdiction. The public must build it collectively from the ground up.
It starts with exposing citizens’ minds to a different notion of society, a new way of doing things. Such practices might initially feel small and irrelevant. However, people build mutual trust and gain confidence in themselves and the system. Through time, the procedure becomes national because one cannot unlock “peoples’ power” to bring about change.
The people’s power can strengthen the rule of law by balancing and even neutralising the top-down pressure placed on courts and police by the authorities. This can ensure limited institutional power following the rule of law. The other one is to allow a people-power movement to create alternative spaces that anticipate a society where the rule of law is respected. Any civil disobedience must have a strategic purpose and be highly disciplined so that participants understand that it does not insinuate a rejection of the rule of law but rather a means to establish it.
Unlike rule by law, the rule of law connotes its essence based on fundamental principles. The law controls the unlimited power exercised by the supreme law-making authority. The law by which the people are ruled is based on those particular principles and rules. Building the concept from the grassroots is needed in a country like ours, where institutions are fundamentally broken or not working to the required level.
Reflection on Moments Promise a Better Tomorrow
It was a lively day with the sun. I dressed sportily in my cap and sunglasses and came out of the house without a rush.
Three red-coloured dumper trucks were visibly parked on the cobblestone alleyway, not far from 50mtr on the main road. One looked like it was moving slowly for a while. What happened next came and passed as a mirage. In the end, I found myself close to a nearby house, clinging to its masonry wall.
It was before I had any thought of moving that the two trucks followed as they roared. The last driver from the three amidst the mayhem swore “Shebaw” (a term used to indicate an old man) through the window, aimed at me, most certainly as he thought my reaction was exaggerated. Thunderstruck and warped, I started to leave the scene and began to argue with myself not to be tied up by such a bizarre and dangerous overdrive.
Struggling to recover my mood that had been swung from frustration, I arrived at the taxi stand close to the neighbourhood. I had a chance to sit in the front. Next to me sat a short, wiry man with a face mask the same as mine. As the vehicle started to move, I sighed deeply and echoed with another breath to grab the attention of all in the minibus and perhaps swing their mood.
The driver and the guy sitting next to me showed heartening looks. I immediately complained about the weather, dubbing the close-to-noon sun as head-splitting. I also made some impromptu remarks. As I struggled with myself, whether it was right to make such an unenthusiastic statement, the young driver followed up with the complaints, compounding the matter with being behind the wheel the whole day.
I followed with how the weather started to feel blistering as I began to get infused with sweat. With the hope of twisting our topic, thus, our mood, I told them that it was not worth complaining about being seated under the comfort of a vehicle’s cover. It looked like we all agreed.
Then surely but slowly, a traffic jam followed. Our chat never gave room for complaints. Suddenly, from a distance to the direction of our back, a red-coloured dumper truck started to honk its deafening horn. My mood swung again to the extent of making me feel the hot weather sweltering. Yet a moment of reflection came in handy to shift my mood for the better.
Then, I was encouraged to narrate the cobblestone alleyway road rage of the three red dumper trucks. The whole passengers in the minibus turned into an audience. As I finished my anecdotes, wishing someone to have a reflection on the almost near-miss accident. The guy next to me, a public prosecutor, continued his astonishing anecdotes. He was in the fieldwork and, graphically through laments, narrated several fatal road accidents he is busy investigating and eventually takes to the court of law.
He focused on the silver lining post facto regrets that almost all youngsters were drivers in several fatal accidents, a positive part of being human that can only help them make clever choices only in their future lives. As I got off the taxi, I pondered the need for daily reflection on what made our day, not the day we wished for, and how we reacted.
Surprisingly, it was a principle further encouraged by the play I was going to see that day; Woody Allen’s “Husbands & Wives”, adopted here for the stage by Samuel Tesfaye at the historic National Theatre. Life lesson disregarded by the freewheeling three young red-coloured truck drivers, as well as all the younger convicts of reckless driving awaiting their verdict, the two couples in the play, yet a message to be publicised everywhere.
No one is perfect, and our challenges are different by the day. We must prepare to straighten our imperfections through reflections on our journeys and act with second thoughts that allow us time to regret.
That sunny Saturday was wrapped up by a play set on a revolving stage, with a stirring impact from a story that reflected a lasting effect on reality. We are as comfortable as possible amidst imperfections through continuous reflection and acting with second thoughts. Failure to follow denies us not feeling the comforts of our everyday circumstances.
Fairer Green Finance Against Climate Change
The global conference on climate change in Egypt looks to be a defining moment in what will surely be a pivotal decade for climate action. Whereas the conference of parties (COP) in Glasgow last year was dubbed the “finance COP,” some have called it the “implementation COP” to reflect its focus on translating funding commitments into concrete plans.
The agenda underscores the need for stronger multilateral cooperation. It highlighted the urgency of honouring the international community’s pledge to close climate-financing gaps in the Global South. Failing to do so will make it challenging to meet the 2015 Paris climate agreement’s central goal of limiting global warming to below two degrees Celsius relative to pre-industrial levels. It will make the efforts to limit the temperature increase to 1.5°c impossible.
Converting financial commitments to investment opportunities is critical to strengthening African climate resilience. While the continent faces the quadruple threat of climate change, disease outbreaks, food insecurity, and political instability, African countries also struggle with enormous budget pressures that impede large-scale investment in economic development. If funding gaps go unaddressed, they will continue to undermine the continent’s opportunity to leapfrog the need for carbon-intensive technologies for progress in achieving the UN’s Sustainable Development Goals (SDGs) and hamper efforts to avert climate catastrophe.
The consequences will be felt far beyond Africa’s borders.
According to recent Climate Policy Initiative estimates, the global climate-financing gap – the difference between the total cost of combined Nationally Determined Contributions under the Paris climate agreement and the financing that governments can provide from their resources to support the net-zero transition until 2030 – is roughly 2.5 trillion dollars. Climate adaptation programs’ funding lags behind investment in mitigation measures, despite the Paris climate agreement’s emphasis on balancing the two.
But Africa’s budget shortfall also reflects the structural problems of its economies. In particular, energy poverty has historically undermined economic diversification and exposed the region to adverse global shocks. The continent’s climate-funding gap amounts to 10pc of its combined 2.4 trillion dollars in GDP – more than double its annual spending on health and social programs – as chronic deficits have constrained governments’ ability to expand public investment and attract private capital.
In 2018, the International Monetary Fund (IMF) highlighted the myriad challenges facing Sub-Saharan African countries in closing the financing gap, including the need to broaden the tax base to increase the capacity of governments to mobilize more revenues domestically. While significant progress has been made over the last two decades, the region’s performance remains dismal. Africa’s median revenue-to-GDP ratio is 20pc, compared to 28pc in East Asia and 42.3pc in Europe.
The financing gap has been magnified by the incidence of sovereign debt, which reflects destructive “perception premiums” – the overinflated risks that credit-rating agencies assign to African countries, irrespective of these countries’ macroeconomic improvements or growth prospects. With the spreads between African sovereign bonds and US Treasuries now in the double digits, debt-service payments have become African governments’ most significant expenditure. Interest payments are expected to consume more than 45pc of Egypt’s government revenues this fiscal year and swallow up over half of the government revenues in Ghana and Sri Lanka.
While elevated interest rates deter investment by setting unrealistically high return expectations, they also directly affect public spending. Financing gaps tend to cloud countries’ development horizons, with urgent short-term needs crowding out the most important long-term investments required to transform economies and expand opportunities for the benefit of future generations. Honouring external debt commitments, for example, will always trump funding climate-resilient infrastructure projects.
But in a world awash with cash, countries should not have to choose between saving the planet and preserving their access to capital markets. At 210 trillion dollars, global financial assets are worth roughly double the world GDP. An inclusive framework that fosters multilateral cooperation between key stakeholders and promotes innovative financing mechanisms could de-risk investment to catalyse private-sector financing. Such a framework must also improve the global distribution of green financing, which has been heavily skewed toward developed economies.
In the first half of 2021, high-income countries issued 76pc of the world’s green bonds.
Policymakers and multilateral development banks can help de-risk green infrastructure investment by encouraging innovative financing instruments such as guarantees, insurance, blended finance, and credit-enhanced bonds. Attracting more banks and institutional investors would raise Africa’s share of global climate financing, which is currently 5.5pc. Policymakers could increase that share by insuring investors against specific hazards and reducing the risk of losses.
Similarly, offering credit protection and extending loan maturities would help leverage more private capital to develop long-term green infrastructure projects.
Donors and multilateral lenders have a crucial role in mitigating overinflated risk perceptions and creating incentives for investors to finance green projects in developing economies. These stakeholders could create first-loss positions to improve portfolio ratings and de-risk projects through concessional funds employed for blended finance and grants. As more investors enter the climate-debt market, multilateral institutions could also enhance the credit of green bonds, thus raising risk appetites and channelling patient capital to where it is most needed.
A robust global carbon market would promote transparency and encourage decarbonization. Likewise, multilateral development banks’ ability to leverage their financial resources to support a liquid secondary market in developing-country sovereign bonds is essential to putting African economies on a path to sustainable development.
The burgeoning green-bond market has entered a virtuous growth cycle and is fast approaching the long-awaited milestone of one trillion dollars in annual green investment. But to encourage equitable climate finance, investors must avoid the stigmas that have long overwhelmed the fixed-income market, where foreign investors shun Africa or invest only at exceedingly high premiums.
Unbiased financing is crucial to winning the global battle against climate change. We must encourage asset managers to lead the charge to ensure sustainable development.
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