Gebrehiwot Ageba and Derk Bienen, October 2008

Negotiations on trade in financial services will be one of the key issues of Ethiopia's WTO accession process. This is due to both the importance of financial services for the economy at large and the nature of trade in services. Regarding the former, financial services, which include banking, insurance, securities and related services, play an important role for national development by steering the flow of resources within the economy. Conversely, the banking industry can also be a source of fragility, especially in countries where domestic economic activity is concentrated in particular industries or commodities, making it difficult to diversify risk and absorb shocks to the financial system.

The purpose of this paper is to provide an ex ante qualitative assessment of the likely consequences of potential liberalisation commitments which Ethiopia may make in its WTO accession with regard to the financial services sector. The paper provides an overview of the Ethiopian financial services sector both from an economic and regulatory perspective, including an analysis of the current degree of openness. It also briefly reviews financial sector liberalisation undertaken in other countries both within and outside the context of WTO accession.

The main findings are that compared to the status quo, improving the efficiency of the financial services sector will require a certain extent of market opening. Such opening will require, however, that a number of measures are adopted by the government and financial sector stakeholders. These relate to, first, the strengthening of domestic financial institutions in order to prepare for increased future competition. Such strengthening will require activities on two levels. At the systemic level, the financial sector infrastructure needs to be improved. This must go hand in hand with capacity building of individual financial services providers in Ethiopia. Second, perhaps even more important is the upgrading of the regulatory framework and supervision capacities.

Trade and development discussion paper no. 02/2008, October 2008

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