Why Ethiopian Business Owners Put Their Money in Foreign Banks

During the recent discussion Prime Minister Abiy Ahmed (PhD) held with the business community in Addis Ababa, one of the major issues raised by the representatives of the private sector was the shortage of foreign currency that has seriously affected their businesses as well as the entire nation. As part of the response, the Prime Minister asked the business leaders to bring back the hard currency they have in foreign banks in Dubai. He said Ethiopian businesses have lots of money deposited in foreign currency in Dubai and Chinese banks. Although asking the businesses to bring back the scarce foreign currency is a right thing to do as part of a short term solution, it is essential to see what factors the businesses to put their money in foreign countries.

Business security
Political volatility is one of the reasons that make businesses insecure and prompt them not to put all of their eggs in one basket. Although it can be regarded as a pessimistic view, political violence like what Ethiopia experienced in recent times caused destruction of assets and the subsequent closure and downsizing of so many businesses. This erodes investors’ confidence in doing business in the country. The fear factor even forces the businesses to down size existing investments let alone to think about expansion, or branching out.
Lack of adequate insurance coverage for risks associated with business interruption or loss of profit as a result of political violence exacerbates the feeling of insecurity among businesses.Even though the government has compensated businesses that suffered from the violence, the incident already put its mark on the minds of new investors too. Such situations cause businesses to keep part of their wealth in what they think are safecountries.

Fear of prosecution
Business owners usually look for business environments whose investment climate and legal system is investor friendly. They constantly search to find ‘safe places’ with less risk of litigations and prosecution. Though it has been partially resolved recently, the investigation and prosecutorial authority given to the Ethiopian Revenue and Customs Authority (ERCA) is still one of the major factor that lead business owners to fear from being prosecuted.

In fact, lots of business owners left the country after they heard rumors that they were being chased by the investigation department of ERCA. Quite a large number of business owners don’t see investigations by ERCA positively and amicably. If ERCA investigates tax report and financial statements of businesses and charge or prosecute them, chances are high of being imprisoned and having their properties confiscated, for ERCA has its own prosecutors and records show that the Authority wins most of its charges. Recently, the investigation and prosecution task has shifted to police and the attorney general’s office, respectively, and yet, so many business owners believe that things have not yet changed because of the lack of awareness.

Further, so many business owners still panic for fear of prosecution for corruption related crimes, tax crimes and other criminal liabilities. It is obvious that, the various laws issued in recent times have a heavy penalty provisions for violation of those laws. The heavy penalties has an impact on the bail right and therefore the business owners may lose liberty. Related to this, the impact of the media is also another problem. Reporting of court cases about the proceeding of the cases, the public knowledge on the delay of the trial and denial of bail right issues on most of the cases has become a frustrating element for business owners.

Lack of confidence on the judicial system
Once prosecuted, confidence in the outcome of the judicial process is another issue. Business owners want to be sure that the judicial process is fair and the outcome is also predictable. By both standards, no professional can provide advice with certainty on the issue.Some business owners want to defend themselves but they are not sure of the outcome, which shows the kinds of reservations that exist against the judicial process. Especially foreign investors complain on so many aspects of our judicial system such as delays, poor quality of judgment, ineffective file management system and the unfriendly nature of the court environment and so on.

More protection to foreign investors
So many business owners frankly speak about their dissatisfaction about the way local investors are treated. They complain that most of the government offices including the Office of the Prime Minister and other ministers are more accessible and responsive to foreign investors than local business leaders. Similarly, local investors argue that more loans are facilitated to foreign investors than the local businesses which add to their dissatisfaction. Wheneverforeign investors appeal to government officials, they are treated better because officials are seriously concerned about protecting the national image and attracting more foreign investors. But if the petitioner is a local one, less attention is given. This adds to the frustration of local investors and contributes for why they keep some of their wealth in foreign lands.

The tax assessment issues
Local business owners complain a lot about the tax administration and clerical hassles they face routinely. These include the lack of objectivity in the assessment criterion especially among sole proprietors; and the presence of corrupt practices while tax assessment. It further goes down to the poor technical and analytical capacity and authority of the tax assessors. The frequent rejection or unsatisfactory response they get especially when they submit complaints against what they feel are unfair and unrealistic tax assessment further affect their confidence of tax system. Most business owners’ fear that one day they may lose their property, which they have labored on so much for decades just because the assessment process is irrational and unfair.

Taking reform measures to address these critical problems is essential to convince business owners who put their money out of Ethiopia as a safety valve from financial insolvency.

6th Year . May 16 – June 15 2018 . No.61