Ethiopia's Economy Eyes Digital Horizon Under Political, Security Upheaval

Oct 28 , 2023.

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In the corridors of global geopolitics, where military and political turbulence often makes headlines, Ethiopia’s quieter march on the roads of digital finance appears to have gained momentum. Prime Minister Abiy Ahmed’s (PhD) Administration recently demonstrated its intent to modernise with the Council of Ministers, giving the nod to a pivotal personal data security bill. It signals that Ethiopia seeks a stake in the budding global digital economy.

Historically, policymakers’ attempts at constructing a data privacy framework have been more piecemeal than cohesive. A scattering of legislations sporadically advocated for personal data protection. But the most promising of them all – a draft crafted by the Ministry of Innovation & Technology experts – remains in the legislative purgatory, awaiting ratification. Notably, a directive mandating financial protection for consumers, issued four years ago, has been a sole sentinel, demanding financial institutions uphold data confidentiality.

Against this backdrop, Ministry of Finance officials proposed revisions to the value-added tax (VAT) proclamation, foretelling a tax on digital transactions. Their goal appears to be enforcing an alignment, bringing digital business models into the fold of broader financial inclusion. However, such fiscal changes tread a thin line, potentially, if not arguably, disincentivising businesses from embracing digital platforms.

With a populace exceeding 100 million, Ethiopia’s economy had been a poster child for growth, during the decade and a half beginning in the mid-2010s. Yet, its headways have been punctuated with slowdown, affected by domestic and external headwinds from global pandemics and droughts to civil wars and volatile commodity markets.

Peeling back the layers of the financial fabric reveals a rather conventional story. Approximately 30pc of the adult population remains tethered to traditional banking systems, while a mere 32pc have the luxury of internet access. For Ethiopians’ digital finance dreams to thrive, creating a regulatory framework that marries protection with transparency should be central.

Recent data does suggest some optimism.

Financial inclusion has seen a modest jump from 22pc in 2014 to 46pc six years later. However, these figures pale in comparison to regional counterparts. The urban-rural divide is particularly pronounced, with city dwellers thrice as likely to own a bank account. Adding to this disparity is the gender divide, with men often leading the charge in account ownership. The federal government’s audacious financial inclusion strategy, which aspires for a 70pc inclusion rate, can be seen as a beacon of hope. A particular spotlight stands on bridging the gender disparity.

Community-centric initiatives, such as savings and credit cooperative organisations, are making valiant efforts. The entry of Safaricom, a telecom behemoth, post-liberalisation after over a century of monopoly by the state-owned Ethio telecom, has given the mobile banking sector a shot in the arm.

Mobile banking, long viewed as a panacea for the financial sector’s woes, remained an elusive dream, shackled by regulations that barred non-bank entities from offering such services until 2020. Even now, with the second permit granted to Safaricom going live and operational, the public is waiting with its boundless patience for optimal services.

With the promise of growing mobile phone usage and a subpar 46pc financial inclusion rate, the mobile banking realm stands on the cusp of a transformative era. But realising this potential demands a harmonious evolution of policy, digital literacy, and trust. Interestingly, the Administration’s blueprint reveals its commitment to this digital dream. The financial inclusion strategy projects a staggering 150pc surge in digital payments by 2025. Barely two years remaining, policymakers can ensure that the digital payments strategy offers specifics, emphasising infrastructural fortitude, innovation, and rigorous regulation.

However, foundational challenges persist as the Prime Minister and his ministers appear to be readying themselves to lead the digital charge. Tech affordability, for one, remains a hurdle. The Administration would do well to reexamine its position on mobile phone import taxation, push for low-cost localised smart feature phones, and negotiate with tech companies for device financing. They can push the industry for USSD service enhancements to lower data costs.

Another imperative is quality networks, especially for communities in far-flung regional states. While market assessments will undoubtedly influence investments, the onus is on mobile service providers to widen their reach.

A symbiotic effort from policymakers, development partners, and service providers can uplift digital literacy. The endgame should be services that are intuitive, convenient, and available in vernacular languages or with visual aids, making mobile money platforms widely accessible. Empowering agents to provide basic digital training can further boost this task.

While promising, Africa’s tryst with digital finance has been marred by hiccups. Redressal mechanisms, particularly in the event of network failures, have often been woefully inadequate. Ethiopia, for instance, wrestles with issues where a flawed ATM transaction can spiral into a week-long bureaucratic nonsense for trivial cash amounts. While the current Administration’s strides towards digitisation are commendable, a multi-pronged, inclusive, and customer-centric approach will determine Ethiopia’s place in the global digital ecosystem.

A dual focus is critical as the country embarks on its digital voyage. While bolstering its digital arsenal is vital, crafting a customer-centric legal framework to address the myriad challenges in the digital domain is equally crucial. Lessons from neighbours, like Tanzania’s sharp decline in person-to-person digital transfers post hefty VAT impositions, should serve as cautionary tales.

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PUBLISHED ON Oct 28,2023 [ VOL 24 , NO 1226]

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