In a major blow to Prime Minister Abiy Ahmed’s plans to attract more foreign investment to East Africa’s largest economy, Ethio Lease, the only foreign financial services company that currently has a licence to operate in Ethiopia, has announced that it will cease to operate in the country.
In 2019 the Ethiopian government granted Ethio Lease a licence that allowed the company to lease critical equipment, such as MRI medical imaging devices and tractors, to companies that lacked sufficient amounts of foreign exchange to import these themselves. Ethio Lease procured equipment from foreign markets using its own reserves of foreign currency and then leased it to local companies in Ethiopian birr, providing a solution to the country’s serious shortage of US dollars and other foreign currencies.
However, the New York-based African Asset Finance Company, which owns Ethio Lease, has now instructed the company to enter into a process of voluntary liquidation. In 2021 the National Bank of Ethiopia, the country’s central bank and regulator, changed the terms of a directive applicable to Ethio Lease. The amendment means that any new lease agreements must include fixed payments denominated in birr rather than in foreign currency.
Ethio Lease tried to lobby the government to change course. It has now concluded that the amendment makes it impossible for it to operate in Ethiopia. The birr’s rapid rate of depreciation – the US dollar has strengthened by over 40% against the birr since 2021 – means that payments fixed in birr months or years in advance are likely to be significantly less valuable in dollar terms by the time the payment is made, denting Ethio Lease’s dollar-denominated profits.
The company’s withdrawal comes at a time when the Ethiopian government is trying to liberalise its economy in a bid to attract greater levels of foreign participation in the domestic market. The government views this as a particularly important task in the aftermath of the war in Tigray that inflicted serious economic damage on the country and deterred many foreign companies from investing in Ethiopia.
The government has privatised swathes of critical national industries, including telecommunications, and has encouraged competition in industries such as banking which have traditionally been dominated by a handful of large domestic players. Earlier this year, Kenyan giant Safaricom was granted a licence to operate mobile money services in Ethiopia, raising hopes that the East African country could be opening up to more international players.
Some fear, however, that Ethio Lease’s decision to wind down its operations in the country could deter other foreign companies from investing in Ethiopia. A European foreign investor, who wished to remain anonymous, notes that “if the only foreign company to get a licence for leasing is leaving, this is obviously a huge red flag that things are not working as they should… it is not a good signal and will likely deter others.”
Hailemelekot Berhan, a capital markets analyst in Addis Ababa, similarly tells African Business that “the withdrawal of such international firms in the wake of the government’s plan to liberalise the financial sector sends a negative message – it sends a negative signal that the business environment in Ethiopia is not conducive to the participation of foreign firms.”
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