The Impact of Ethiopian Accession to the WTO on its Financial Service Sector

Abstract

Ethiopia, the most populous least-developed country outside of the World Trade Organization, is on the process of accession since 2003. What the potential implications of this accession will be for the financial service sector, which is widely closed from foreigners participation, is an interesting question since liberalization commitments under the GATS have different impact on different modes of supply and for different stakeholders. Financial services are key to any properly functioning economy and hence their liberalization which caries many advantages and risks is a sensitive issue requiring acceding governments to carefully handle the negotiation process by addressing their basic needs. This thesis discusses the impact of Ethiopian accession on its financial service sector focusing on the banking, insurance and micro finance sectors, and market access and national treatment issues. It identifies different commitment scenarios under each mode of supply considering the potential legal and economic impacts on stakeholders i.e. consumers, domestic financial institutions and the government of Ethiopia. It asserts that Ethiopian poor financial service sector which is dominated by the banking sector and public financial institutions will highly benefit from the conditional liberalization of mode 1 and mode 4; full liberalization of mode 2; and liberalization of mode 3 through branches, equity participation and/or subsidiaries. This combination of scenarios seems the most feasible that allows Ethiopia to take advantage of the liberalization process while simultaneously minimizing the spill-over risks . Moreover, acceding to the WTO alone will not enable Ethiopia to achieve growth in the financial service sector or economically. Therefore, the Ethiopian government should equally pay attention to solving domestic problems of regulation, corruption and lack of competition. It should also exploit other alternatives and privileges like regional integrations, bilateral trade agreements and general system of preferences.

Ethiopia, the most populous least-developed country outside of the World Trade Organization, is on the process of accession since 2003. What the potential implications of this accession will be for the financial service sector, which is widely closed from foreigners participation, is an interesting question since liberalization commitments under the GATS have different impact on different modes of supply and for different stakeholders. Financial services are key to any properly functioning economy and hence their liberalization which caries many advantages and risks is a sensitive issue requiring acceding governments to carefully handle the negotiation process by addressing their basic needs. This thesis discusses the impact of Ethiopian accession on its financial service sector focusing on the banking, insurance and micro finance sectors, and market access and national treatment issues. It identifies different commitment scenarios under each mode of supply considering the potential legal and economic impacts on stakeholders i.e. consumers, domestic financial institutions and the government of Ethiopia. It asserts that Ethiopian poor financial service sector which is dominated by the banking sector and public financial institutions will highly benefit from the conditional liberalization of mode 1 and mode 4; full liberalization of mode 2; and liberalization of mode 3 through branches, equity participation and/or subsidiaries. This combination of scenarios seems the most feasible that allows Ethiopia to take advantage of the liberalization process while simultaneously minimizing the spill-over risks . Moreover, acceding to the WTO alone will not enable Ethiopia to achieve growth in the financial service sector or economically. Therefore, the Ethiopian government should equally pay attention to solving domestic problems of regulation, corruption and lack of competition. It should also exploit other alternatives and privileges like regional integrations, bilateral trade agreements and general system of preferences.