Fortune News | Feb 18,2023
In an audacious bid to attract investment to a country experiencing diminishing forex inflows, the National Bank of Ethiopia (NBE) allows investors to bank with a financial institution different from their incorporated jurisdiction with a directive approved last week.
The opening and operations of offshore accounts prioritise infrastructure development, power generation and mining projects indicated as "strategic foreign direct investments", which promise substantial export earnings.
Regulators at the Central Bank may also grant permission for other sectors in consideration of their job creation, import substitution and forex generation possibilities, according to the new directive which does not explicitly state a minimum capital threshold.
Vice Governor Fikadu Digafe explains that the eligibility of projects will be viewed in terms of their potential contribution to key economic variables before being granted offshore privileges. He jovially expressed most projects that request offshore banking modalities are capital and technology-intensive, taking place in extended durations.
"Any investor with a couple of million won't make the cut," he told Fortune.
The projects will be required to provide quarterly financial reports of the inflows and outflows of the account while providing annual projections of their potential forex earnings and expenses.
"We approve the banks in which the accounts will be open," the Vice Governor noted to Fortune in reference to efforts to facilitate their regulatory function. The banks in which the offshore accounts open will also have to be grade-one, entailing strong financial soundness, according to Fikadu.
External debt servicing costs, capital expenses, insurance and warranty payments are eligible for payment from offshore accounts
Meanwhile, the debt-to-equity ratio which indicates the proportion of liabilities to total shareholder's equity in order to measure the reliance on debt of a company to fund its projects raised to 80:20.
The directive signed off by Governor Mamo Mehretu last week sets in a foreign currency convertibility guarantee that entails dividend repatriations and loan repayment assurances after the project owner exhausts all possible foreign currency purchases from local commercial banks.
While the convertibility clause is limited to Public-Private-Partnership Projects in energy and mining deemed as "strategic", they will be preceded only by national debt servicing obligations in their forex allotment hierarchy at the prevailing market exchange rate.
Despite a letter by Prime Minister Abiy Ahmed (PhD) granting oil and gas companies the right to operate offshore accounts four years ago in response to pleas from now-defunct Chinese gas mining company Poly-GCL Ethiopia historically has restricted offshore banking practices for investors. Several reasons, such as money laundering, capital flight and tax evasion, have been cited by prior administrations for not allowing offshore accounts.
The restriction has been touted by academics and investors alike as a critical hindrance to the inflow of foreign investment into the country for many years.
"Legal guarantees go a long way in attracting private capital," said Tadesse Lencho (PhD), founder and managing partner of TbeST Law LLP. He indicated that international financers are usually put off from foregoing funds in developing countries without the ability to control their money.
Tadesse explained that the new set of stipulations will create novel ways of enforcement for institutional investors to keep a close eye on their money. He said offshore accounts allow creditors to freeze funds in the case of delayed repayments.
"Large-scale investments heavily rely on credit," Tadesse told Fortune in reference to mining and power generation projects.
While he lauded the reforms pushed by the central bank, he recognises that implementation and supervision will be a tall task without the cooperation of other countries to prevent capital flight and tax evasion.
Tadesse referred to tax treaties between Ethiopia and the Netherlands that seek to harmonise tax collection as an example of possible 'administrative assistance agreements' to create transnational regulatory capacities.
A study by the Bank of International Settlements, which looked at data across a 15-year period, suggests that emerging economies have been relying on offshore financial modalities more and more after the Great Financial Crisis of 2008.
While the government of Ethiopia has only ever issued a single offshore bond, namely a Eurobond with coupon payments of 33 million dollars slated for December, several large-scale private projects have relied on complex financing structures to fund their investments.
Recently, a close to 400 million dollar gold mining project in Welega Zone, Oromia Regional State by London-based KEFI Gold & Copper was announced as a beneficiary of the shift in policy, with shareholders receiving an update last week that the final action point for the financing package has been completed.
The project involves corralling funds from different institutions across the world, including the Africa Finance Corporation (AFC) and the Eastern and Southern Africa Trade & Development Bank (TDB).
Investors and entrepreneurs applauded the move indicating that it will simplify managing financial commitments across multiple countries, recognising an increased allure of the business environment for foreign investors in line with the recent policy orientation.
Ermias Amelga, contemplates that the new development is most likely a result of a careful study of the impediments of investment inflows by the regulators at the Central Bank.
"Repatriation of funds has been a sticking point for most foreign investors," he said, emphasising the role of the convertibility guarantee.
The directive came bearing hopeful news for mining companies such as Akobo Minerals operating in the Segele Shama Gold District of Gambella Regional State.
The CEO Jorgen Evjen observes a potential on the horizon with the recent changes made by the Ministry of Mines and the National Bank of Ethiopia.
"This is a move I have been asking for the past year," Jorgen told Fortune.
Acknowledging the importance of managing an offshore account as crucial in creating flexible debt and repayment with international lenders raising hundreds of millions of dollars, he noted that the ability to manage upfront payments from an offshore account will make a big difference in project execution.
He is hopeful new exploration companies will come to Ethiopia following the changes, with the possible establishment of a mine in the long run.
"The investment risk will change dramatically for us," he said.
Investment consultants concur that most local companies fail to grow to a transnational status due to the formidable hurdles in freely moving their money across accounts in multiple countries.
Through a career spanning three decades, the managing partner of BDO Consulting, Million Kibret, has observed restrictions on the free movement of capital in and out of Ethiopia as a push factor for global investors.
"It should expand to other sectors as well," he told Fortune, recommending that businesses outside those deemed strategic get included in the scheme.
Million does not consider offshore accounts as posing risks of tax evasion either, arguing that opening bank accounts actually creates a dependable source of financial information for tax authorities.
"Contemporary investment is highly reliant on debt," he said, applauding the raising of the debt-to-equity ratio. He referred to a global trend in investment circles which utilizes small equity in the form of seed capital while financing the majority of the endeavour through debt instruments.
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