In today’s interconnected global economy, financial threats pose significant risks to both individual entities and entire nations. The threats can take various forms, including fraud, cyberattacks, economic downturns, and systemic risks stemming from poorly regulated financial institutions. Moreover, a weak financial system can exacerbate these threats, leading to instability, reduced economic growth, and increased vulnerability to crises.
A robust financial system is essential for fostering trust, facilitating investment, and supporting sustainable economic development. However, when a financial system is weak categorized by inadequate regulations, lack of transparency, and poor risk management it becomes susceptible to shocks that can ripple through the economy. Such vulnerabilities not only hinder financial stability but also limit access to credit and resources for individuals and businesses, ultimately close innovation and economic progress of the country.
Over the years, Ethiopia has liberalized its key sectors including telecommunication and is poised to allow foreign entities to engage in the financial sector of the country. Safaricom, a Kenyan telecom service provider was given some percent of stakes in the telecom industry.
In the past years, the country had a closed economy and set aside a certain industries for domestic investments, which the former regime government said was essential to safeguarding both natural security and local companies. Under the previous regime, the finance and telecom sectors were restricted for foreign investment in which the government argued market liberalization will weaken domestic business and put national security in danger.
In what could be a new breakthrough, Ethiopian cabinet on 14 June 2024 approved a bill that allows foreign lenders to establish local subsidiaries and acquire shares in local banks. The new law is waiting lawmakers’ approval.
According to the bill, reputable, financially sound and well‑established foreign banks would be allowed to set up a partially or fully owned subsidiaries; open a foreign bank branch or representative office; or purchase shares in an existing bank. They will also be permitted to employ foreign nationals as senior executives, although foreign banks operating in the country will be required to include resident Ethiopians on their boards.
The arrival of foreign companies in to the country however according to will pose threats to national security unless strong regulatory and security measures are placed. In fact there have been solid instances of the grave danger facing nations that went through economic liberalization.
The experiences of nations like Sri Lanka in 2022 demonstration this: while foreign investments initially boosted the economy, a subsequent financial crisis triggered rapid capital flight, leading to severe currency devaluation and widespread economic hardship.
Weak financial security systems often lack the regulatory frameworks necessary to manage foreign investments effectively. This was evident during the 1997 Asian Financial Crisis, where inadequate oversight resulted in reckless lending practices and sudden capital outflows. Similar issues have occurred in countries like India, Greece, and Argentina.
Recently, Ethiopia made a pivotal decision to rejuvenate its economy by opening its doors to foreign financial investment. The government assumed that to liberalize the economy sector for the process of reducing the government restrictions and allowing for a more open free market environment. This approach is often indicated for promoting competition, innovation, and enhancing economic growth. However, argues that stated that it can also lead to excessive risk-taking by financial institutions and inadequate oversight, ultimately causing crises that impact economies in a country.
Weak financial security could allow foreign investors to take advantage of weaknesses in the financial system, causing capital flight, according to an economic analyst who told exclusively to The Ethiopian Herald a few weeks ago.
As a result, many struggle that before accepting foreign investment, nations should focus on strengthening their financial institutions. Ethiopia’s economic sovereignty may be in danger if local financial institutions become unduly reliant on foreign investors, According to economist Atlaw Alemu (PhD).
He stated that, a major economic collapse could result from the withdrawal of foreign investors, threatening the country’s financial independence and raising the possibility of foreign meddling in internal matters.
In recent years, countries are increasingly adopting digital payment systems, driven by the need for efficiency, security, and convenience. However, this rapid technological advancement has introduced new vulnerabilities. Studies indicate that cyber-attacks and digital espionage now pose a greater threat to national security.
According to a Forbes report, over 340 million individuals fail victim to cyber-attacks in the last fiscal year, with projections suggesting that the costs associated with these attacks could exceed eight trillion USD by the end of 2023. This underscores the urgent need for robust cyber security measures. .
The country has foiled over 4,550 cyber-attacks in the first six months of the concluding fiscal year. The attack increased by 115% compared to last year. According to INSA, the country could have lost 186 million USD has the attacked succeeded. Forbes ranks Ethiopia as the 8th most vulnerable nation to cyber threats, emphasizing the critical need for enhanced protective strategies and public awareness.
In his parts, Scholar of Economy Costantinos Berhetesfa (PhD) stated that, the National Bank of Ethiopia needs to focus on developing new interest rate policies, expanding the money flow, and managing and strengthening financial security measures. Establishing a stable economic environment that can encourage investment and boost economic activity requires these adjustments, he said.
Concerns have been raised about the National Bank’s ability to effectively lead a market economy. Critics argue that the institution lacks the necessary experience and expertise to navigate the complexities of modern financial systems. To address this gap, there are calls to bring in experts from other countries that have good ability with successful economic transitions, Costantinos noted.
He mentioned by leveraging international knowledge and best practices, the National Bank could implement reforms that align with the demands of a dynamic market economy. This approach could ultimately strengthen investor confidence and promote sustainable growth in Ethiopia’s economic landscape.
Atlaw urged measures to strengthen the local financial system and guarantee its resistance to outside forces, underscoring the dangers of financial subservience and nd possible loss of economic autonomy.
“As we navigate this digital landscape, it is imperative to prioritize cyber security to safeguard our personal information and national security against rapidly evolving threats,” Costantinos stated.
He highlighted recent microeconomic reforms designed to attract foreign investors, aiming to create a more favorable business environment that encourages international capital inflow and fosters economic growth. This strategy seeks to generate job opportunities for citizens by introducing modern technological systems, addressing issues related to foreign currency shortages and the prevalence of black money.
In addition to pointing out that the inflow of global financial institutions might foster competition, Atlaw underlined the transformative potential of foreign investment. Both experts advise the government to take proactive steps to safeguard national sovereignty.
BY FIKADU BELAY
THE ETHIOPIAN HERALD TUESDAY 26 NOVEMBER 2024
