Ethiopia's WTO Accession and Financial Services Liberalization: Striking the Balance between Trade Liberalization and Domestic Policy Space

AuthorTilahun Esmael Kassahun
PositionLL.M (Business Law) Addis Ababa University, LL.M (International Economic Law and Policy, IELPO) University of Barcelona
Pages200-240
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Tilahun Esmael Kassahun
Abstract
This article examines some of the main provisions of the General Agreement on
Trade in Services (GATS) and the Annex on Financial Services to evaluate its
impact on domestic financial regulation and macroeconomic policy. In
particular, it analyzes whether Ethiopia can – upon accession and within the
WTO’s GATS framework – achieve the objective of liberalizing international
trade in financial services while maintaining adequate domestic regulatory
institutions and the normative framework needed in this regard. The article
investigates whether GATS provides a flexible framework for Ethiopia to
negotiate liberalization commitments while at the same time preserving a
sufficient level of domestic regulatory space to achieve financial and economic
stability.
Key words
WTO accession, GATS, financial liberalization, domestic policy
space, trade liberalization, Ethiopia
DOI http://dx.doi.org/10.4314/mlr.v6i2.2
Acronyms and Abbreviations
BOP
GATS Balance of Payments
General Agreement on Trade in Services
GATT General Agreement on Tariffs and Trade
IMF International Monetary Fund
MFTR
MFI Memorandum of Foreign Trade Regime
Micro Finance Institution
NBE
WTO National Bank of Ethiopia
World Trade Organization
LL.M (Business Law) Addis Ababa University, LL.M (International Economic Law
and Policy, IELPO) University of Barcelona; the author teaches at Haramaya
University College of Law and is currently on study leave. He would like to give his
sincere gratitude to the editorial team at Mizan Law Review and the two anonymous
reviewers for their valuable comments, remarks, and suggestions. He can be reached
at .
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Introduction
The WTO was established as a successor of the General Agreement on Tariffs
1
Built upon a broader legal and political base than the
GATT, it can correctly be described as the mutated GATT.
2
The WTO covers
numerous trade agreements, one of the most important being the WTO General
Agreement on Trade in Services (GATS).
3
This accord which came into force in
January 1995 is the first and only set of multilateral rules that cover trade in
services, with a broad scope and coverage of all traded services including
financial services.
4
Ethiopia has applied to accede to this system in 2003 and is
now deeply involved in the multi-stage accession process whereby negotiations
on trade in financial services will be one of the key issues that determine
Ethiopia's WTO accession. This is due to both the role of financial services for
the economy at large, the closed nature of the service against foreign investment
and the nature of WTO negotiating trade in financial services considering
potential market failures and regulatory issues in these services.
5
This article
addresses these issues.
However, the article does not address broad questions on the economic and
social benefits of financial market reform and liberalization. Nor does it deal
with the benefits and positive externalities of financial market and trade policy
reform for broader financial sector development, growth, income distribution
1 World Trade Organization (1999), The Legal Texts, The Results of The Uruguay
Round Of Multilateral Trade Negotiations, Marrakesh Agreement Establishing The
World Trade Organization.
2 Michael J. Trebilcock and Robert Howse (1999), The Regulation of International
Trade, Second Edition, Routledge, See Chapter 1; An Intellectual History of
International Trade Theory And Policy, pp. 1-24.
3 GATS, supra note 1.
4 The word “trade in services” has earlier history since 1973 under the OECD
framework. See OECD (1973), Report by the High Level Group on Trade and Related
Problems, Paris: OECD.
5 All this can be seen from various official and non official statements. See for instance
the views of the Minister of Foreign Affairs who stated his belief that “existing
differences on the telecom and financial sectors should not be impediments to the
ongoing accession process as Ethiopia had expressed its readiness to work on these
issues on a short-to-medium term basis.”
http://www.mfa.gov.et/weekHornAfrica/morewha.php?wi=789>.
Also see Venture
Africa which stated that “[k]ey issues pertaining to Ethiopia joining the WTO have
surrounded the opening up of currently state-monopolised sectors, such as the
telecommunications and finance sectors, while the country has also been called upon
to allow investment by foreign entities.”
set-to-join-wto-by-2014/> .
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and poverty.
6
Without denying the importance of these questions, the study
assumes that sufficient literature exists in this realm.
7
Rather, this article focuses
on GATS commitments (of WTO Members) in financial services and its impact
on national policy objectives. The central inquiry will be whether there exists
any reason for Members to hold back on GATS commitments in order to retain
the freedom to pursue certain macroeconomic and regulatory policy objectives
of their internal economy.
Accordingly, the evaluation of the system below shows that commitments
under GATS need not compromise the ability of governments to pursue sound
regulatory and macroeconomic policies and hence still leaves them with
considerable freedom to achieve other domestic policy targets. Based on the
examination of the possible commitment scenarios which Ethiopia can possibly
commit to, the author argues that there exists no reason why GATS
commitments on financial services will have to compromise Ethiopia’s ability to
pursue sound regulatory and macro-economic policies.
8
6 On all these issues generally see John Williamson and Zdenek Drabek (1999),
Whether and When to Liberalize Capital Account and Financial Services, World
Trade Organization Economic Research and Analysis Division, Staff Working Paper
ERAD-99-03; Gerard Caprio (2001), Financial Liberalization, How Far, How Fast?,
Cambridge University Press; Stiglitz, J. E. (2000), Capital Market Liberalization,
Economic Growth, and Instability, World Development, Vol. 28, 1075-1086; World
Trade Organization, WTO (1997), Newsletter , Liberalizing Trade in Financial
Services: Why It Matters? Focus No. 22; Agénor, Pierre-Richard (2001), Benefits and
Costs of International Financial Integration: Theory and Facts, Policy Research
working paper, 2699, the World Bank; Jonse Bane (2002), Merits and Demerits of
Allowing Entry of Foreign Banks into the Ethiopian Banking Sector Banking Sector:
Lessons From Selected Countries, Paper Prepared for the First International
Conference on the Ethiopian Economy organized by EEA (January 3-5, 2002 Addis
Ababa, Ethiopia)
7 See Kiyota, K., Peitsch, B., and M Stern, R. (2007), The Case for Financial Sector
Liberalization in Ethiopia, Research Seminar in International Economics, Discussion
Paper No. 565, University of Michigan and Yokohama National University; Robert
M. Stern et al., (2007), Assessment of the Impact of the General Agreement on Trade
in Services (GATS) on the Ethiopian Financial Services Sector, Ministry of Trade and
Industry, Addis Ababa; Gebrehiwot Ageba and Derk Bienen (2008), Ethiopia's
Accession to The WTO and the Financial Services Sector, Munich;, Also see,
Solomon Abay Yimer (2011), Financial Market Development, Policy and Regulation;
The International Experience and Ethiopia’s Need for Further Reform, Academisch
Proefschrift, ter verkrijging van de graad van doctor aan de Universiteit van
Amsterdam.
8 Financial services fall into two broad categories: insurance and banking, both of which
cover a range of activities.
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To this end, the article evaluates the existing norms under the general WTO
framework, and in particular GATS commitments and thereby examines to what
extent the existing framework under the WTO allows regulatory freedom and
policy space to achieve objectives such as prudential regulation and macro-
economic policy. The article also evaluates to what extent Ethiopia’s
commitment scenario could be shaped-up to maintain the economic and
regulatory space stated above and the tools needed in this regard. In particular, a
detailed analyses of some of the main provisions of the GATS and the Annex on
Financial Services will be made to determine its impact on domestic financial
regulation and whether Ethiopia can achieve, under the WTO’s GATS
framework, an objective of liberalizing international trade in financial services
while allowing itself maintain adequate domestic regulatory institutions.
The article is organized into three major sections. The first section provides
an overview of the nature of GATS commitments and the modality of
negotiations. This will be followed by the second section which briefly
discusses Ethiopia’s Accession to the WTO and Financial Services and the
experience of recently acceded developing and least developed countries. The
section also highlights the possible commitment scenarios with which Ethiopia
could accede to the system. The last section consists of the major topics of
discussion and evaluates the Ethiopian Case of financial market liberalization
and economic policy space followed by a conclusion.
1. The Nature of GATS Commitments and Modality of
Negotiations
Rather than representing itself as a liberalization agreement, GATS mainly
provides a framework for liberalization of trade in services.
9
In so doing, it is
based on three pillars. One, it includes a framework agreement, which contains a
comprehensive general accord governing all possible sectors (i.e. financial
services, telecommunications, and information technology).
10
Two, special
sector annexes and other agreements, such as the Understanding on Financial
Services, contain provisions focusing specifically on the sector concerned.
11
It
finally, consists of scheduled commitments on market access, national treatment
9 Peter Van den Bossche (2005), The Law and Policy of the World Trade Organization
Text, Cases and Materials, Cambridge University Press, p 480.
10 See GATS Part II General Obligations and Disciplines.
11 The list of annexes include; Annex on Article II Exemptions, Annex on Movement of
Natural Persons Supplying Services under the Agreement, Annex on Air Transport
Services, Annex on Financial Services, Second Annex on Financial Services, Annex
on Negotiations on Maritime Transport Services, Annex on Telecommunications,
Annex on Negotiations on Basic Telecommunications.
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and other commitments.
12
With regard to the last point, the GATS define trade
in financial services, like in other services, in terms of four modes of supply,
which are respectively referred to in this article as Mode 1, Mode 2, Mode 3 and
Mode 4:
For the purposes of this Agreement [i.e.
GATS], trade in services is defined
as the supply of a service: (a) from the territory of one Member into the
territory of any other Member; (b) in the territory of one Member to the
service consumer of any other Member; (c) by a service supplier of one
Member, through commercial presence in the territory of any other
Member; (d) by a service supplier of one Member, through presence of
natural persons of a Member in the territory of any other Member.
13
These modes are in short referred to as cross-border supply of services (Mode
1), consumption abroad (Mode 2), commercial presence (Mode 3), and
temporary movement of natural persons (Mode 4).
In terms of market access, GATS does not provide positive and normative
definition for market access but only provides six types of restrictions that a
member cannot impose, unless identified in its schedule.
14
Conceptually this is
similar to the principles of quantitative market access limitations under GATT
Art XI.
15
Generally, GATS Art XVI:2 provides for rules that prohibit members
from imposing market access limitations on: (i) the number of service suppliers
whether in the form of numerical quotas, monopolies, exclusive service
suppliers or the requirements of an economic needs test; (ii) the total value of
service transactions or assets; (iii) number of operations or quantity of output;
(iv) number of natural persons supplying a service; (v) type of legal entity or
joint venture or, finally; (vi) limitations on the participation of foreign capital in
terms of maximum percentage limit on foreign shareholding or the total value of
individual or aggregate foreign investment, unless properly provided in their
schedules. The existence of any limitations in these areas has to be indicated
12 See GATS Art XX, Schedules of Specific Commitments; 1. Each Member shall set
out in a schedule the specific commitments it undertakes under Part III of this
Agreement.
13 General Agreement on Trade in Services (GATS), Art I.
14 Ibid, Art XVI.
15 General Elimination of Quantitative Restrictions: “1. No prohibitions or restrictions
other than duties, taxes or other charges, whether made effective through quotas,
import or export licences or other measures, shall be instituted or maintained by any
contracting party on the importation of any product of the territory of any other
contracting party or on the exportation or sale for export of any product destined for
the territory of any other contracting party.”
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with respect to each of the four modes of supply in scheduled sectors.
16
The idea
is that such market access limitations are prohibited even if they are not
discriminatory.
17
At the same time, GATS does not provide a comparable list in respect of
national treatment restrictions, and it is up to members to ensure that all
potentially relevant measures are listed in sectors where commitments are
scheduled and, if they wish, members can inscribe various types of national
treatment limitation (e.g., regarding taxation or regulations).
18
“If a member no
longer wishes to conform to its specific commitments, it may modify its
schedule by providing compensation in the form of alternative market access
(even across sectors).”
19
“However, this undertaking may involve difficult
negotiation and often creates
confusions regarding the member’s
commitments.”
20
With respect to the final part of the GATS framework, the GATS schedules
are key framework instruments providing the list of services with members’
commitments in terms of market access, national treatment and additional
commitments. The lists of services correspond to GATT secretariat
classification,
21
which is a standardized harmonized framework also following
numerical references to the Central Product Classification system of the United
Nations.
22
It is important here to recall that, depending on how commitments are made,
treaties liberalizing trade in services make use of either a ‘positive list’ or a
16 This done in accordance with United Nations CPC classification (Statistical Papers,
Series M, No.77, 1991). Also see WTO, Guidelines For The Scheduling Of Specific
Commitments Under The General Agreement On Trade In Services (GATS), Adopted
by the Council for Trade in Services (2001).
17 Nicolas F. Diebold (2010), Non Discrimination In International Trade In Services
‘Likeness’ In WTO/GATS, Cambridge University Press, p 29.
18 Art XVII lit 2 states; A Member may meet the requirement of paragraph 1 by
according to services and service suppliers of any other Member, either formally
identical treatment or formally different treatment to that it accords to its own like
services and service suppliers.
19 International Monetary Fund, Reference Note on Trade in Financial Services,
Prepared by the Strategy, Policy, and Review and Legal Departments (September 3,
2010) p 5 90310.pdf > General
Agreement on Trade in Services (GATS), Art XXI: Modification of Schedules.
20 Ibid.
21 See Uruguay Round, Services Sectoral Classification List, Note by the Secretariat,
MTN.GNS/W/120 (10 July 1991).
22 Various versions available, see for instance, Central Product Classification, CPC
Version 1.1, (Updated: 21.02.2002), Version submitted to the United Nations
Statistical Commission, 5-8 March (2002).
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‘negative list’ approach.
23
Under a positive list approach, countries undertake
national treatment and market access commitments specifying the type of access
or treatment offered to services or service suppliers in scheduled sectors. The
alternative top-down approach is based upon negative listing, whereby all
sectors and measures are to be liberalized unless otherwise specified by
reservations or non-conforming measures. This is the so-called “list-or-lose
technique.”
24
GATS follows a ‘hybrid trend’; a positive list for sectoral
coverage and a negative list for limiting market access and national treatment
commitments “(with the qualification that even here, the GATS allows for
entries that are ‘unbound’, that is where no commitment at all are made for a
particular mode of supply under a given sector).”
25
If a service sector is listed in the national schedule, it implies that the listing
economy has liberalized its domestic market in that sector for trade and is ready
to offer market access to foreign suppliers. It applies to all the members on a
non-discriminatory basis in the selected services area. The GATS accord is
fairly flexible, and members have complete freedom in choosing services as
well as the degree to which foreign services suppliers can operate in their
domestic markets. For instance, if a member country chooses financial services
and commits to open its domestic banking sector for foreign suppliers, it is also
free to limit market access by limiting the number of licenses it grants.
Additionally, it may predetermine the number of foreign bank branches it is
going to allow to operate in its territory. Thus, the services agreement, unlike the
GATT, provides for both market access and national treatment limitation.
26
Consequently, despite the almost unanimous agreement that GATS is a
technically difficult agreement to comprehend, there is also outstanding
evidence that trade negotiations over GATS is comparatively less rigid for
23 James Gillespie (2000), Financial Services Liberalization in the World Trade
Organization, Harvard Law School, p 11.
24 Sherry M. Stephenson (2001), Multilateral and Regional Services Liberalization by
Latin America and the Caribbean, A Publication of the Organization of American
States Trade Unit (March 2001) p 30.
25 Sherry Stephenson and Patricio Contreras, An Asymmetric Approach to Services
Liberalization: the European Union-Mercosur Case,
_ARTICLE/steph01_asym.as
p
>
(accessed Jan 2013) Also See Sherry M. Stephenson, Approaches to Liberalizing
Services, Development Research Group of the World Bank (DECRG). The positive
list approach was adopted specifically at the request of developing countries which
felt they did not have the administrative resources required to determine all the
measures that apply to each sector and to decide which they want to exempt. See Paul
Kruger, GATS Commitments of the SADC EPA Configuration, Tralac (2009).
26 Dilip K. Das (2005), The Doha Round of Multilateral Trade Negotiations: Arduous
Issues and Strategic Responses, Palgrave Macmillan, p 131.
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negotiating members inside the system which is equally relevant to those in the
process of accession because of the following major peculiarities of GATS.
First, member/acceding countries identify the sectors and sub-sectors for making
commitments to foreign services suppliers. Although members have a schedule
of commitments, there is no minimum requirement in this regard. Members
have liberty to identify as small part of one sector for guaranteeing the rights of
foreign suppliers to provide services as they please.
27
Second, having identified
the sector(s), member/acceding governments have a right to set limitations on
market access and the degree of national treatment they are willing to guarantee.
Third, developing country governments frequently limit their commitments to
one or two modes of supply through which services can be traded. Furthermore,
if they see it is reasonable and appropriate, they may withdraw or renegotiate
commitments.
28
This modus operandi has thus rendered the GATS accord
essentially and relatively adaptable and accommodating.
29
2. Ethiopia’s Accession to the WTO and Financial Services:
Setting the Stage
Accession to the WTO is a protracted, multi-stage and complex process.
30
Essentially, the way to become a WTO member is through accession “on terms
to be agreed” between the acceding country or customs territory and other WTO
members.
31
The WTO Agreement does not contain any further guidelines on
27 Generally see, Council for Trade in Services, Guidelines for the Scheduling of
Specific Commitments Under The General Agreement On Trade In Services (GATS),
S/L/92 (2001).
28 GATS Article X Sub 2: In the period before the entry into effect of the results of the
negotiations referred to in paragraph 1, any Member may, notwithstanding the
provisions of paragraph 1 of Article XXI, notify the Council on Trade in Services of
its intention to modify or withdraw a specific commitment after a period of one year
from the date on which the commitment enters into force; provided that the Member
shows cause to the Council that the modification or withdrawal cannot await the
lapse of the three-year period provided for in paragraph 1 of Article XXI.
29 Dilip K. Das, supra note 26 above. This however does not mean that there is a ‘level
playing field’ in the WTO accession process. Unfortunately, acceding members have,
more often than note, less bargaining chip than incumbent members.
30 ICTSD, An Analysis of the WTO Accession Guidelines for Least Developed
Countries; ICTSD Programme on Competitiveness and Development; Information
Note; International Centre for Trade and Sustainable Development, Geneva,
Switzerland, , (2012), p 2.
31 Art Article XII:1 of the Marrakesh Agreement Establishing the WTO states, “Any
State or separate customs territory possessing full autonomy in the conduct of its
external commercial relations and of the other matters provided for in this Agreement
and the Multilateral Trade Agreements may accede to this Agreement, on terms to be
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what the “terms to be agreed” are or how the accession process is going to
follow from here except that it leaves the discretion to the incumbent WTO
members and the results of the negotiations.
32
Within the above context, the accession process can be categorized into a
four stage process of multilateral and bilateral negotiation. The first stage starts
when the acceding country (or customs territory as the case may be) submits its
formal request of membership and its Memorandum of Foreign Trade Regime
(MFTR). This is a document that provides detailed sets of information on the
country’s economic, political and legal infrastructure that mostly has to do with
international trade. The second stage in the accession process establishes a
designated working party which is a multilateral negotiation medium open for
all interested WTO members and it essentially involves a fact finding process.
At this stage members would send various sets of questions based on the MFTR
submitted. It is an important stage which makes sure that the internal policies
and laws of the acceding country are in compliance with the WTO Agreement.
This stage is followed by,
33
the third stage of bilateral negotiation between the
acceding country and individual WTO members. It is perhaps the most
important stage of the negotiation process as it determines the shape of
commitments to be taken by the acceding country. The final stage deals with
more administrative issues such as drafting the terms of accession protocol,
schedules of commitments and of course involves final decision making by the
WTO Ministerial Conference.
34
Ethiopia applied for the accession to the WTO in January 2003 and the
WTO’s General Council has established a Working Party to which the
Government of Ethiopia submitted a Memorandum of Foreign Trade Regime of
the country for the consideration of WTO members. Until December 2012 the
working party has met three times and Ethiopia is in the process of responding
to its fourth set of questions from WTO members about the workings of its
economy and trade regime.
agreed between it and the WTO. Such accession shall apply to this Agreement and
the Multilateral Trade Agreements annexed thereto.” It is to be noted that this
provision follows similar language contained in the accession provision of GATT
Art. XXXIII.
32 Ivan Marković (2009), How To Join The World Trade Organization: Some Aspects
Of The Accession Process, Economic Annals, Volume LIV, No. 180, (January –
March 2009) p 121.
33 Often overlaps are also common between the multilateral negotiations under the
working party meetings and bilateral trade negotiations.
34 According to Art XII:2, “[d]ecisions on accession shall be taken by the Ministerial
Conference. The Ministerial Conference shall approve the agreement on the terms of
accession by a two-thirds majority of the Members of the WTO.”
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As part of achieving membership in the WTO, Ethiopia will enter into
bilateral negotiations with various members of the WTO and perhaps will be
required to make commitments to market access for a number of sectors and
modes of supply in the services sector. As an LDC, Ethiopia is likely to be given
some flexibility in assuming liberalization commitments in services.
35
However,
it should be expected that Ethiopia will be asked to agree to some threshold of
liberalization in the financial sector, and it is important for Ethiopia to develop a
negotiating strategy that protects its macroeconomic and regulatory interests but
also be prepared to undertake some commitments in these sectors. Ethiopia will
also be required to have a system of transparency in regulation that meets the
general obligations of the GATS.
2.1. Experience of Recently Acceded Countries
The vast number of agreements for the liberalization of trade in services that has
been implemented both at the multilateral and bilateral levels has shed light on
the negotiating strategies that might be considered by governments in order to
obtain the full benefits of liberalization. “The main conclusion arising from
these experiences is that no specific recipe can be prescribed for negotiating the
liberalization of trade in services,”
36
but that, whatever negotiating modality is
chosen, it should take into account the speed with which the economies of
participating countries are able to open their markets to international trade and
the degree to which the agreement is capable of conveying credibility.
37
“The
legitimacy of an agreement will depend upon how it is structured, while the
35 Although it is not as effective as it ought to be, the WTO Guideline on LDCs
accession is a notable indicator to these flexibilities. See WTO, Guidelines for
Accession of Least-Developed Countries, WTO document WT/L/508 of 20 January
2003, Decision of 10 December 2002. Paragraph 1 states for example “1.Market
Access -WTO Members shall exercise restraint in seeking concessions and
commitments on trade in goods and services from acceding LDCs, taking into
account the levels of concessions and commitments undertaken by existing WTO
LDCs' Members.” Also see recent efforts to “further strengthen, streamline, and
operationalize the 2002 LDC accession guidelines,” under the Eighth WTO
Ministerial Conference in December 2011. Accession of Least-Developed Countries
Decision of 17 December 2011WT/L/846, (19 December 2011).
36 Sherry Stephenson and Patricio Contreras, supra note 25.
37 In exploring the current account implications of alternative speeds of liberalization,
studies have shown that in a framework where a country faces a borrowing
constraint, a gradual liberalization of trade is to be preferred to an immediate
approach. However, this question is one that has often been debated in the economic
literature and no universally agreed conclusion exists with respect to the optimum
speed of undertaking trade liberalization, whether for goods or services. Generally
see World Bank, Finance for growth: Policy choices in a volatile world, Policy
Research Report (2001).
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ability of members to implement the commitments to be undertaken will depend
to a considerable extent on their level of development and particularly on the
sophistication of their regulatory instruments”.
38
The commitment scenarios of
four recently acceded developing and least developed countries are highlighted
below.
2.1.1. Kingdom of Cambodia
“Cambodia has undertaken market access commitments in at least one sub-
sector under each of 11 different services headings under the WTO
classification”.
39
The Cambodian Law on Banking and Financial Institutions and
subsequent regulations guaranteed foreign banks rights and obligations equal to
local banks and there was no restriction regarding foreign ownership of banks.
40
Accordingly, Cambodia made commitments on: acceptance of deposits and
other repayable funds from the public, lending of all types, including, among
others, consumer credit, mortgage credit, factoring and financing of commercial
transaction, and all payment and money transmission service, including credit,
charge and debit cards, travellers’ cheques and bankers drafts.
41
Thus Cambodia
did not commit to financial services under sub-sectors B(c), (e), (f)–(l).
42
Cambodia maintained that it will unbound these sectors until the Government
determines what types of entities can conduct these services, the related laws
and regulation are established, and such business is authorized by the
government or other relevant designated authority. Thus, the commitments for
subsectors (a), (b) and (d) only refer to commercial banking.
2.1.2. Cape Verde
The accession schedule of Cape Verde shows that, Cape Verde made market
access commitments on Mode 2 and 3 on sectors such as (v) acceptance of
deposits and other repayable funds from the public; (vi) lending of all types,
including consumer credit, mortgage credit, factoring and financing of
commercial transaction; (vii) financial leasing; (viii) all payment and money
38 Sherry Stephenson and Patricio Contreras, supra note 25.
39 Sok Siphana (2005), Lessons from Cambodia’s Entry into the World Trade
Organization, Asian Development Bank Institute, ADBi Publishing -11/05, p 51.
40 Samnang Chea, et al., Trade in Services in Cambodia, ASEAN Economic Forum,
es/Topics/Services/
Cambodia-Asean_services.pdf> (last accessed April 2012).
41 World Trade Organization, Report Of The Working Party on The Accession Of
Cambodia, Addendum Part II- Schedule of Specific Commitments in Services List of
Article II MFN Exemptions, T/ACC/KHM/21/Add.2 (2003).
42 These sectors are (c) Financial leasing, (e) Guarantees and commitments, (f) Trading
for own account or for account of customers, (g) Participation in issues of all kinds of
securities, (h) Money broking and finally (i) Asset management.
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transmission services, including credit, charge and debit cards, travellers’
cheques and bankers drafts; (ix) guarantees and commitments; (x) trading for
own account or for account of customers, whether on an exchange, in an over-
the-counter market or otherwise, the following: (A) money market instruments
(including cheques, bills, certificates of deposits); (B) foreign exchange; (C)
derivative products including, but not limited to, futures and options; (D)
exchange rate and interest rate instruments, including products such as swaps,
forward rate, etc.
43
Cape Verde also made commitments on areas of (xi)
participation in issues of all kinds of securities, including underwriting and
placement as agent (whether publicly or privately) and provision of services
related to such issues (xii) money broking (xiii) asset management, such as cash
or portfolio management, all forms of collective investment management,
pension fund management, custodial, depository and trust services (xiv)
settlement and clearing services for financial assets, including securities,
derivative products, and other negotiable instruments, while at the same time
Cape Verde forfeited the privilege to discriminate against foreigners except on
Mode 4, in accordance with limitations under horizontal commitments. In the
meantime Cape Verde, in its financial services head note, maintained that it will
permit the establishment of branches for committed sub-sectors in insurance,
banking and securities within 10 years from the date of Cape Verde's accession
to the WTO.
44
2.1.3. Kingdom of Nepal
The schedules of services commitments of the Kingdom of Nepal shows that
Nepal made full market access and national treatment commitments (except on
Mode 4) on all Banking and other Financial Services,
45
which includes; (a)
acceptance of deposits and other repayable funds from the public, (b) lending of
all types, including, inter alia, consumer credit, mortgage credit, factoring and
financing of commercial transactions, (c) financial leasing (d) all payment and
money transmission services (e) guarantees and commitments (f) trading for
own account or for account of customers, whether on an exchange, an over-the-
counter market, participation in issues of all kinds of securities, including under-
writing and placement as agent (whether publicly or privately) and provision of
service – related to such issues. It further includes (h) money broking, (i) asset
43 Cape Verde, Report of The Working Party on The Accession of Cape Verde:
Addendum, Part II Schedule of Specific Commitments in Services List of Article II
MFN Exemptions, WT/ACC/CPV/30/Add.2.
44 Ibid.
45 For a detailed review of the financial services reform in Nepal see, Project Research
& Management Associates P. Ltd (2007), Study on Financial Sector Reform in
Nepal; Overall Impact and Public Ownership of Financial Institution, South Asian
Network of Economic Institutes –SANEI.
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management, such as cash or portfolio management, all forms of collective
investment management, pension fund management, custodial depository and
trust services, (j) settlement of and clearing services for financial assets,
including securities, derivative products, and other negotiable instruments, (k)
provision and transfer of financial information, and financial data processing
and related software by providers of other financial services, and (l) advisory
services on all the activities listed above.
46
In the meantime, Nepal maintained under the services schedule head notes
that financial services in the form of operations identified in the Schedule can be
carried out in Nepal only through a locally incorporated company. Importantly,
branches for insurance services and wholesale banking were scheduled to be
allowed only as of 1 January 2010.
47
In addition, only a licensed commercial
bank, a licensed specialized bank or a registered finance company may accept
deposits. Only financial institutions with rating of at least 'B' by ‘Credit Rating
Agency’ e.g. MOODI, Standard & Poor can have commercial presence in
Nepal. Another important limitation is the total foreign shareholding in any
institution providing financial services which is limited to 67 per cent of the
issued share capital. It has, nevertheless, been bound for the existing foreign
financial service providers as to their scope of operation and equity structure.
Nepal also maintained that the shares held by foreign nationals and foreign
financial institutions in their locally incorporated companies are not transferable
without the prior written approval of the Nepal Rastra Bank (the central bank) or
any other competent authority as the case may be. Moreover, representative
offices in Nepal may not be engaged in commercial business.
48
2.1.4. Jordan
Jordan’s GATS commitments in financial services are not different from the
other recently acceded states. Essentially, Jordan made full market access and
national treatment commitments on banking services such as; acceptance of
deposits and other repayable funds from the public, guarantees and
commitments and money broking.
49
The only exceptions were that Jordan bound
a national treatment exception on mode one that real property in Jordan may not
be mortgaged to banks outside Jordan and that national treatment on Mode 4 is
unbound, except as indicated in the horizontal section while, branches of foreign
banks are required to have a resident regional manager. Jordan also made
46 World Trade Organization (2004), Trade in Services, The Kingdom of Nepal,
Schedule of Specific Commitments, GATS/SC/139.
47 Ibid.
48 Ibid.
49 World Trade Organization (1999), Report of the Working Party on the Accession of
Jordan, Schedule CXLVIII-Jordan, WT/ACC/JOR/33/Add.2, WT/MIN(99)/9/Add.2.
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market access and national treatment commitments with respect to, lending of
all types including consumer credit, factoring, mortgage credit, and financing of
commercial transaction, financial leasing and all payment and money
transmission services, except that under mode three market access is limited to
services provided through banks and specialized financial companies and like
the above commitments branches of foreign banks are required to have a
resident regional manager.
50
Jordan made full national treatment commitments on the first three modes
with the usual limitations on Mode 4 and at the same time made market access
commitments on Mode 1 and Mode 2 with an exception to derivative products
which are unbound. On Mode 3, access is restricted to: banks and financial
services companies constituted in Jordan, in the form of public shareholding
company, Limited Liability Company or a limited partnership in Shares
Company.
51
Finally, with respect to advisory and other auxiliary financial
services on all the activities including credit reference and analysis, investment
and portfolio research and advice, advice on acquisitions and on corporate
restructuring and strategy and provision and transfer of financial information as
related to financial data processing and related software by providers of other
financial services, Jordan made market access and national treatment
commitments except with respect to the former access which is restricted to
financial services companies constituted in Jordan.
52
2.2. The Financial Services Market, Policy and Ethiopia’s
Possible Commitment Scenarios
The current picture of financial services in Ethiopia is dominated by banks.
“Banks are the dominant financial institutions in the country” and they “account,
on average, for 96% of total gross financial assets. Non-banks account only for
about 4%”.
53
Unfortunately, the current state of performance of the banking
services in the country is one of the lowest in sub-Saharan Africa. “Ethiopia has
a very low rural banking density and consequently one of the lowest financial
inclusion ratios of Sub-Saharan Africa, with only 14 percent of adults having
access to credit. Most of the bank branches are in urban areas. The ratio of the
rural population to a commercial bank or a Micro Finance Institution (MFI)
branch is one branch to 125,158 people. Thus it is not surprising that only one
50 Ibid.
51 Ibid.
52 Ibid.
53 Ebisa Deribie (2012), The Effects of Post 1991 Era financial sector deregulations in
Ethiopia: An Inspirational guide for agribusiness, Research Journal of Agricultural
Science and Review ISSN 2315-6880 Vol. 1(4) pp. 81-87 (October 2012) p 82.
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percent of the rural population have bank accounts”.
54
In the meantime, Ethiopia
is the host of one of the fastest growing microfinance institutions in the World.
By the end of 2005, “26 MFIs had 1,277,939 borrowing clients with an
aggregated portfolio of 1.622 billion Birr”.
55
“Ethiopia’s insurance industry is
relatively undeveloped which is exemplified by the sector’s low penetration
levels there are an estimated 0.3 million formal insurance clients in
Ethiopia”.
56
According to the Centre for Financial Regulation and Inclusion
report; “insurance premiums, including life and general insurance, totaled US
$105 million in the 2006/07 financial year represented merely 0.2% of GDP in
2007 - while in Kenya and Namibia premiums represent 2.5% and 8.1% of GDP
respectively”.
57
From the public governance side of the market, major economic policy and
regulatory interests revolve around areas of financial stability and banking
regulation. The Ethiopian legal regime in banking services regulation takes the
form of nationality and investment limitations in the banking sector.
The typical forms of limitations in relation to investment in banks are:
the nationality requirement restriction, the restriction on maximum
amount of investment (shares) to be held by a single investor/related
investors, and the prohibition of an investor having allegedly substantial
investment in one bank (influential shareholder) from investing in any
other bank. On the other hand, Ethiopian law has delineated the scope of
banking activities and it has also limited the scope of equity
participation of banks in other firms.
58
Financial stability issues in Ethiopia are centred towards the closed nature of
international capital account and restrictions on the free convertibility of foreign
exchange. Concerns in this regard are highly tied with the aim to maintain price
54
World Bank, Enabling Environment: Access to Financial Services and
Transportation, technical brief (2012) finfacility.org/enabling-
environment-access-financial-services-ethiopia
>
(last accessed Jan 2012).
55 Alemayehu Yirsaw (2008), The Performance of Micro Finance Institutions in
Ethiopia: A case of six microfinance institutions, Addis Ababa University Master
Thesis, p 6.
56 AEMFI, Association of Ethiopian Microfinance institutions, Overview of Ethiopia’s
Insurance Industry,
articles.html?...14%3Ainsurance-overvi
>
... (Last accessed Jan 2012) Generally see
Hailu Zeleke (2007), Insurance in Ethiopia: Historical Development, Present Status
and Future Challenges. Addis Ababa: Master Printing Press.
57 Ibid.
58 Getnet Temechew (2010), Investment Limitations in and by Banks in Ethiopia, Addis
Ababa University The School Of Graduate Studies Faculty of Law, Master’s thesis, p
51.
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and exchange rate stability, and achieving balance of payments equilibrium
since these are ongoing problems in the country.
Currently, Ethiopia does not have limits on the number of banks, insurers and
microfinance institutions that have to be licensed. It, however, prohibits the
ownership of these institutions by foreign nationals and foreign owned juridical
persons.
59
This aspect of financial sector development was also common in most
developed, developing and transition economies of Eastern Europe, Asia and
Latin America.
60
But in due time, most of these countries, including African
states have removed these types of restrictions and opened up their financial
markets for foreign investment after the reforms of the late 1980s and the
1990s.
61
The works of international and regional institutions, primarily the IMF,
World Bank and WTO, were instrumental in this regard.
62
The first among the four modes of supply, in GATS Part I terms, relates to
cross border supply of financial services. In this particular mode, the experience
of WTO Members and recently acceded countries shows that Ethiopia can
possibly maintain the status quo of whatever practically exists now. It may also
seem viable to achieve this in the accession negotiations as this is one of the
most important modes which is highly dependent on international capital
transfers and hence possibly entails capital movement volatility. Such strategy
also seems wise considering other objectives of financial market liberalizations
such as technology transfer and transfer of managerial skills or any other
expectations of positive spillover from openness. Compared to Mode 3 trade for
instance, liberalization of cross-border trade in financial services carries more
59 See Investment Proclamation, (Proclamation No 769/2012). And the regulation,
Investment Incentives and Investment Areas Reserved for Domestic Investors
Council of Ministers Regulation, Regulation No 270/2012 Art 3. For former legal
instruments see Re-Enactment of the Investment Proclamation, Proclamation No.
280/2002, According to the Investment Proclamation, The banking, insurance, and
micro-credit sectors, are restricted to domestic investors; Also see Transitional
Government of Ethiopia, Licensing and Supervision of Banking Business
Proclamation No. 84/1994, Art 4(2); Also see Federal Democratic Republic of
Ethiopia, Banking Business Proclamation No. 592/2008, Arts 4(1)(d), 2(5) & 9.
60 Earl H. Fry, The Politics of International Investment (McGraw-Hill Book Company,
1983) p.133, Also see Ha-Joon Chang, Foreign Investment Regulation in Historical
Perspective: Lessons for the Proposed WTO Agreement on Investment, University of
Cambridge, Faculty of Economics and Politics, (2003) p 1; Jeswald.W.Salacuse,
Direct foreign investment and the law in Developing Countries, Foreign Investment
Journal, Vol.15,No. 2, (2000) p. 389-390.
61 See Solomon Abay Yimer, supra note 7, p 26.
62 Generally see Ahn, Dukgeun, Linkages between International Financial and Trade
Institutions: IMF, World Bank and WTO, Journal of World Trade 34(4).
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risks and fewer benefits.
63
The experiences of recently acceded countries also
seem to allow this scenario. But, of course, new precedents can always be set
any time and hence pressure to commit to this mode is expected.
On the other hand, compared to other service sectors, Ethiopia is less likely
to bear pressure to commit in Mode 2 financial services. Considering the virtual
impossibility of regulation against individuals and firms consuming services
abroad, this mode also seems the less difficult for Ethiopia to swallow. The
experience of recently acceded countries also shows that with the exception of
Nepal, this mode has been fully liberalized by all acceded countries. Indeed, the
consumption of financial services abroad is almost impossible to monitor or
distinguish from other modes of trade.
64
Therefore, offering full liberalization of
this mode might be a wise tactical move by any acceding country as it
constitutes a liberalization proposal without incurring any cost.
65
With respect to the third mode of supply, i.e., commercial presence, Ethiopia
currently has one of the few overtly protected financial markets in the world.
66
Primarily, the current system does not allow commercial presence of foreigners
in the financial sector. This perhaps will be the most important subject of
negotiations in Ethiopia’s accession bid and possibly the entire accession
negotiations can become contingent upon the commitment result of this
particular service sector and mode of supply. Thus, potentially, there exists a
very small chance that Ethiopia will be able to join the system without
committing anything in this particular sector. But still there can be different
scenarios of commitment levels.
For starters, one option is entry through equity ownership, with significant,
but less than 100% share. This still would allow the various macro and
efficiency benefits expected out of foreign partaking. Basically, the increased
capital base would increase availability, accessibility and affordability of
finance to the economy in general.
67
The other scenario is full commercial
63 Gebrehiwot Ageba and Derk Bienen, supra note 7, p 13.
64 Marion Panizzon, Nicole Pohl And Pierre Sauvé (2003), GATS and The Regulation of
International Trade In Services, Cambridge University Press (2008) pp. 183-187,
Also see Sydney J. Key (2003), The Doha Round and Financial Services
Negotiations, The AEI Press, Washington DC, p 8.
65 Gebrehiwot Ageba and Derk Bienen, supra note 7.
66 Kozo Kiyota et al. (2007), The Case for Financial Sector Liberalization in Ethiopia,
Research Seminar In International Economics, Gerald R. Ford School of Public
Policy, Discussion Paper No. 565, p 4.
67 Generally see Kevin Davis, Competition Policy in Banking and Financial Services,
petition%20Policy%20i
n%20Banking%20and%20Financial%20Services-Mar08.pdf
>
(last accessed May
2012).
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presence. This is both economically useful and will also address other
regulators’ concerns that Ethiopia faces. Basically under this scenario, the
subsidiary's solvency is determined by its own financial performance, and in
accordance with the laws and regulations set by the Ethiopian government. This
strategy could also be accompanied by the type of market access limitations
enumerated under Art XVI.
68
The experience of recently acceded counties
shows that market access limitations in this mode are less limited compared to
limitations on national treatment, whereas in this latter case as well most of
recently acceded countries have eliminated all or virtually all limitations on
national treatment.
69
With regard to the last mode of supply, Mode 4, the issues will be highly
entrenched with the commitment scenarios undertaken under the 3rd mode.
Moreover, there is less pressure from the accession negotiations and perhaps
less concern from domestic economic considerations towards committing to this
mode. In this respect almost none of the recently acceded countries made
commitments in this mode. This reinforces any strategy Ethiopia could have in
this regard.
3. Financial Market Liberalization and Domestic Policy
Space
The financial services sector is a key to any properly functioning economy.
70
Essentially, the sector facilitates financial intermediation in the economy (i.e.
mobilization and allocation of funds). Financial services are also important for
the economy as a whole since it allows financial transfers and payments. Hence,
a healthy and stable financial service is essential for sustainable economic
68 These include limitations on the number of service suppliers ( e.g. such as ceilings on
the total number of banks); limitations on the total value of transactions on assets
(e.g. foreign bank subsidiaries limited to X per cent of total domestic assets of all
banks); limitations on the total number of service operations or on the total quantity
of service output (e.g. restrictions on amount of lending capital for foreign firms);
limitations on the total number of natural persons (in particular non-nationals) that
may be employed in the sector (or the share of wages paid to foreign labour);
restrictions on, or requirements of, specific types of legal entity through which that
service may be supplied (e.g. commercial presence exclude representative offices,
foreign companies required to establish subsidiaries, commercial presence must take
the form of a partnership, commercial presence must take some form of
incorporation); and limitations on the participation of foreign capital.
69 See section 2.1 above in this article.
70 Gary Gorton and Andrew Winton (2002), Financial Intermediation, Wharton
Financial Institutions Center, p 1.
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growth.
71
Conversely, instability in financial service can potentially have
economy-wide effects (local or global) and can be seen most dramatically in the
crisis in Latin America, East Asia and the US financial crisis where fragility in
the financial system spilt over to other countries in the region and the World at
large.
72
The process of review of domestic regulation and the accompanying
regulatory reform go hand-in-hand with services liberalization under any given
approach. It is a common understanding that services liberalization involves
essentially the removal of discriminatory regulation, whether in quantitative or
qualitative form, while nondiscriminatory restraints are a matter of domestic
regulation. This distinction allows countries to tackle the reduction of barriers to
services trade, on the one hand, and the reform of domestic regulation, on the
other.
73
In the WTO accession context, the challenge today is on how to fine
tune financial sector liberalization with the necessary legislative and
institutional reforms which will enable it to easily accomplish the objectives of
financial liberalization without at the same time tearing down legitimate
regulatory instruments and risk financial collapse.
Accordingly, it is important to keep in mind that services liberalization and
domestic regulatory reform must go forward in a parallel and unified path so
that liberalization does not occur faster than the necessary regulatory reform in
service sectors that are susceptible to specific types of market failure. Thus the
Ethiopian government is expected to set appropriate sequencing and moderating
infrastructure parallel to market liberalization efforts. In the mean time, it should
71 John Bonin and Paul Wachtel, Financial Sector Development in Transition,
Economies: Lessons from the First Decade, Financial Markets, Institutions &
Instruments, V. 12, No. 1, New York University Salomon Center (February 2003) p 1
72 International Finance Division Research Department Nepal Rastra Bank, A
Comparative Review of Financial Services Sector Commitments in The Selected
SAARC Member Countries: Relevant Experiences For Nepal’s Accession to WTO, p
4.
73 This issue has been extensively discussed in the context of the classification of
market access and national treatment commitments under GATS. See Feketekuty,
Geza (2000), Improving the Architecture of the General Agreement on Trade in
Services, in Sherry Stephenson (eds.), Services Trade in the Western Hemisphere:
Liberalization, Integration, and Reform, Brookings Institution Press, Chapter 1; Low,
Patrick and Aaditya Mattoo, Is There a Better Way? Alternative Approaches to
Liberalization under GATS, (in) Pierre Sauvé and Robert M. Stern, GATS 2000: New
Directions in Services Trade Liberalization, Brookings Institution Press, Chapter 15
Also see, Stephenson Sherry, GATS and Regional Integration, in Pierre Sauve and
Robert Stern (eds.), GATS 2000: New Directions in Services Trade Liberalization,
Brookings Institution Press, 2000, Chapter 18.
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be noted that efforts towards multilateral trade negotiations, typically the WTO,
do not obstruct the government’s policy options to achieve these objectives.
Four types of government intervention or involvement are believed to have
impact on the financial services sector, namely: (i) macroeconomic policy
management, (ii) prudential regulations, (iii) non-prudential regulation to pursue
various public policy objectives other than that falling under, and (iv) trade
restrictions concerning market access or national treatment.
74
A brief discussion
is made on three of these issues in the context of Ethiopia’s accession to the
WTO. Under the GATS, item (ii) is dealt with by paragraph 2 of the Annex on
Financial Services, and (iii) by Article VI. Item (iv) is dealt with by Articles
XVI and XVII.
3.1. Financial Sector Liberalization and Capital Account
Liberalization
3.1.1. GATS on Capital Movements
Global experience with financial deregulation and liberalization has been a mix
of bewildering array of experiences. “Several countries have suffered serious
banking crises following the opening of their financial markets, and, as formal
econometric work shows, banking crises have generally been good predictors of
currency crises.”
75
GATS does not, in principle, oblige a Member to allow
international capital mobility.
76
It is to be noted that liberalization of capital
movements is distinct from – but closely related to liberalization of trade in
financial services.
77
For example, provision of financial information by foreign
financial organizations is entirely unrelated to capital account liberalization.
78
In
the meantime, if a Member undertakes a market-access commitment in relation
to the cross-border supply of a service and if the cross-border movement of
capital is an essential part of the service itself, the Member is consequently
74 See WTO (1997), Opening Markets in Financial Services and the Role of the GATS,
WTO Special Studies, Geneva.
75 Peter K. Cornelius (2000), Trade in Financial Services, Capital Flows, and the
Value-at-Risk of Countries, Harvard Institute for International Development,
Research Note RN-00-2, p 3.
76 Victor Murinde and Cillian Ryan (2003), The Implication of WTO and GATS for the
Banking Sector in Africa, Blackwell Publishing Ltd ; See footnote text 9, p 185.
77 A. Kireyev (2002), Liberalization of Trade in Financial Services and Financial
Sector (analytical approach), IMF Working Paper WP/02/138, pp 10-14. Also see
Tamirisa, N. et al (2000), Trade Policy in Financial Services, IMF Working Paper
WP/00/31.
78 See A.Kireyev, Ibid, pp. 10-14.
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committed to allow such movement of capital.
79
Further, if a Member
undertakes a market access commitment in relation to the supply of a service
through commercial presence, that Member is committed to allow related
inflows of capital.
80
Thus, the establishment of a commercial presence in a host country by a
foreign service supplier involves both trade in services under the GATS and
international capital transactions.
81
In theory, it is still possible that once
established, a subsidiary of a foreign financial firm could conduct its on-going
activities without engaging in additional international capital transactions.
82
However, its activities would need to be limited to transactions with host-
country residents involving domestic financial assets.
83
This may happen in very
rare circumstances – and certainly not in a small developing economy.
WTO Members do not seem to have any obligation with respect to capital
flows related to consumption abroad and capital outflows related to commercial
presence.
84
Hence, GATS primarily mandates Members to liberalize inward
79 See A. Cornford (2003), The Multilateral Negotiations on Financial Services :
current issues and future directions.
80 This is particularly provided under footnote 8 of Art XVI GATS which states: “[l]f a
Member undertakes a market-access commitment in relation to the supply of a
service through the mode of supply referred to in subparagraph 2(a) of Article I and if
the cross-border movement of capital is an essential part of the service itself, that
Member is thereby committed to allow such movement of capital. If a Member
undertakes a market-access commitment in relation to the supply of a service through
the mode of supply referred to in subparagraph 2(c) of Article I, it is thereby
committed to allow related transfers of capital into its territory.”
81 As we all know, the capital account covers capital movements for investments while
the current account covers (the payment of) imports and exports of goods and
services.
82 This could for instance be a situation where the foreign subsidiary wishes to raise its
capital from equity or debt capital from the host economy itself. Thus only later, for
example, when the bank wishes to repatriate profits from its foreign operations, may
a capital flow occur, but out of the host country. See for instance Sydney J. Key,
Financial Services (in) Patrick F. J. Macrory et al, (eds.) The World Trade
Organization: Legal, Economic and Political Analysis, Volume 1, Springer, 2005, p
962.
83 Under standard balance-of-payments accounting, however, even if the earnings of the
subsidiary were reinvested, they would be regarded as additional foreign direct
investment by the parent in the subsidiary.
84 This can be inferred by reading Article XI, the provision on international payments
and transfers together with footnote 8 to Article XVI, the market-access provision.
See Wendy Dobson, Financial Services and International Trade Agreements: The
Development Dimension (in) Aaditya Mattoo et al, (eds.), A Handbook of
International Trade in Services, Oxford (2008) p 294; For Mode 2 transactions, not
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transfers of international payments in connection with services that are provided
pursuant to a specific commitment made under the GATS.
85
“The bottom-line is
that if a country makes a commitment to liberalize trade with respect to a
particular financial service in the GATS, it is also making a commitment to
liberalize most capital movements associated with the trade liberalization
commitment”.
86
The country is not, however, making an across-the-board
commitment to freedom of capital movements.
87
While GATS Article XI, as a general rule, prohibits any restrictions on
international transfers and payments on sectors subject to commitments, it
permits exceptions in five sets of circumstances. These are: (1), restrictions
which are applied to safeguard the balance of payments in accordance with
Article XII GATS; (2), in case a general exception applies in accordance with
Art XIV and XIVbis GATS; (3), in case an exception applies in accordance with
Para 2 lit. a, of the Annex on Financial Services; (4), in the case of current
transactions, if consistent with the rights and obligations of the members of the
IMF under the IMF Agreement; or (5), in the case of capital transactions, at the
request of the IMF. The types of restrictions that can possibly lie under GATS
Article XII and Para 2 (lit a) of the Annex on Financial Services will be
discussed in the subsections below.
The first of the other three exceptions relates to the case of current
transactions, which are consistent with the rights and obligations of the members
even this obligation exists. Rather, under Mode 2 countries seem to be free to set
restrictions on capital transfers related to services supplied under the market access
commitments made. As Kono et al. (1997, p. 23) emphasize, “(t)he GATS focuses
upon seeking improvements in the terms and conditions of market access and non-
discriminatory treatment for foreign suppliers of financial services, and not on the
question of how far and how fast a government liberalizes capital account
restrictions.” See Peter K. Cornelius, supra note 75 above.
85 Christian Tietje et al. (2010), Liberalization and Rules on Regulation in the Field of
Financial Services in Bilateral Trade and Regional Integration Agreements; A
Scientific Study, Halle, September, p 7.
86 Sydney J. Key, Financial Services (in) Patrick F. J. Macrory et al, (eds.) supra note
82; See GATS Article XI: Payments and Transfers.
87 Sydney J. Key (2003), supra note 64. Also see Diemo Dietrich et al (2010),
Liberalization and Rules on Regulation in the field of Financial Services in Bilateral
Trade and Regional Integration Agreements, Institute of Economic Law (TELC),
Martin Luther University Halle-Wittenberg, p 12. In the words of Dietrich et al
“GATS does not aim at the overall liberalization of international payments and
transfers. However, it provides for a ‘conditional obligation’ according to which
WTO members must not restrict current transactions and capital transactions that
have been made in relation to service for which a member has undertaken specific
commitments.”
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of the IMF under the IMF Agreement. This exception permits certain
transitional or, with the IMF’s prior approval, temporary restrictions in
accordance with Article XIV and VIII of the IMF Agreement.
88
The second
exception refers to situations where the IMF Agreement permits any of these
practices and, to the extent that they relate to current transactions, the IMF
Agreement will take precedence over the GATS to avoid any inconsistencies
between IMF and GATS rights and obligations.
89
The reference made to ‘the
request of the Fund’ “relates to Art VI Section 1 [of the] IMF Agreement under
which the IMF may request a Member to impose capital controls”,
90
to prevent
“the use of the IMF’s resources to meet a large or sustained outflow of
capital”.
91
Therefore, as with current transactions, the IMF Agreement takes
precedence regarding capital transactions, but only if (direct or indirect) capital
controls actually have been requested by the IMF.
92
The last exception refers to the General Exceptions under Arts XIV and
XIVbis. These exceptions to Article XI provide for exceptions to a Member’s
obligations under the GATS in a number of circumstances. These articles refer
to concerns such as measures maintained to protect public morals or to maintain
public order, measures necessary to secure compliance with laws or regulations,
essential security interests etc. This essentially means that a member can
maintain measures such as seizure or blocking of assets in connection with
bankruptcy or to enforce criminal procedures. Thus, even
though such measures
can, strictly speaking, amount to restrictions of
international transfers and payments,
they prevail over other GATS rules for public policy reasons by operation of
Articles XIV and XIVbis over the rules of Article XI.
Thus, we can see that GATS does not oblige WTO members to fully
liberalize capital flows related to the activities of such local establishments. This
means that the opening up of financial services is consistent with an option to
maintain certain capital account restrictions. “This is particularly important to
88 Rüdiger Wolfrum, et al (2008), WTO – Trade in Services, Max Planck Commentaries
on World Trade Law, Martinus Nijhoff Publishers, p 255; Generally see Deborah E.
Siegel (2002), Legal Aspects Of The IMF/WTO Relationship: The Fund’s Articles Of
Agreement And The WTO Agreements, 562 The American Journal Of International
Law, Vol. 96:561.
89 Ibid.
90 Rüdiger Wolfrum, et al, supra note 88, p 256, Articles of Agreement of the
International Monetary Fund, IMF, Article VI Capital Transfers, Section 1.
91 Joshep Gold (1991), Borrowing by the IMF, ultra vires and other problems, (in)
Jacob A. Frenkel and Morris Goldstein, (eds.) International Financial Policy: Essays
in honour of Jacques J. Polak, p 215.
92 Ibid.
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most of developing countries, where domestic financial markets remain
underdeveloped and small, and balance of payments positions are weak”.
93
3.1.2. The Ethiopian Case
Ethiopia authorizes the National Bank of Ethiopia (NBE) – the central bank – to
regulate the supply of money and interest rates of financial institutions, the use
of foreign currency, exercise of foreign exchange transactions and exchange
rates of the financial institutions, and the conditions, limitations and
circumstances under which residents of the country and the financial institutions
can hold foreign currency and instruments of payment in foreign currency.
94
Thus, for the moment (considering the closed status of the financial services
sector now), there does not seem to be any case where the practice of the
National Bank would essentially violate the main principles and the important
exceptions of the GATS provisions.
The Ethiopian government is expected to negotiate demands by considering
what should be done in the accession negotiations to achieve legitimate
economic goals under this issue. In principle, “domestic reform and trade policy
reform can be seen as precursors of capital account liberalization”.
95
A sound
and diverse financial system will better intermediate volatile international
capital flows. However, a variety of sequences seen in various countries will
demonstrate that there is no one-size-fits-all approach to sequencing. For
example, Taiwan has not fully deregulated its domestic financial markets and
still imposes some restrictions on the capital account, but it permits market
access by foreign financial service providers.
96
South Korea restricted both
market access and capital flows, yet in 1997 it experienced a severe balance of
payments crisis related in part to a weak record of domestic reform.
97
Thus,
93Yun-Hwan Kim (2002), Financial Opening Under The WTO Agreement In Selected
Asian Countries: Progress And Issues, Asian Development Bank, ERD Working
Paper No. 24 (September 2002), p 2.
94 The National Bank of Ethiopia Establishment (as Amended) Proclamation No
591/2008, Articles 5 (4), 5 (5-6 and 9-10) and 19-21; Micro-Financing Business
Proclamation No. 626/2009, Article 28 (1).
95 Wendy Dobson, supra note 84.
96 Ibid, p 294.
97 Ibid, Also according to Yoon Je Cho “The immediate cause of the crisis was the run
of foreign creditors.” “The accelerated opening up to international capital flows from
1994 without adequate supervision also contributed to the currency crisis. See Yoon
Je Cho, The Role of Poorly Phased Liberalization in Korea’s Financial Crisis (in)
Gerard Caprio (eds.) (2001), Financial Liberalization, How Far, How Fast?,
Cambridge University Press, p 159.
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there is no clear-cut evidence which correctly shows the relevant relationship
between financial market liberalization and financial crisis.
98
Moreover, it is to be noted that financial services liberalization does not
necessarily imply complete capital account liberalization. Yet, it is important to
find strategic ways to limit the country’s exposure to potential financial crises.
For instance, it appears that the relationship between trade in financial services
and capital flows is particularly close under Mode 1 (cross-border supply) than
the other modes. The experience of WTO members also shows that at present,
relatively few countries have made commitments under Mode 1, reflecting fears
that a more liberal trade policy in this mode could seriously undermine financial
stability while its potential gains are in contrast limited. Studies have shown the
various contrasting effects of commitments under the various modes of GATS
commitments. The table below shows a simple representation of the effects of
financial services commitments on capital flows and the financial system as
affected by the mode of supply and range of instruments.
Table 1: Effects of Financial Services Commitments on Capital Flows and the Financial
System, As Affected by the Mode of Supply and Range of Instruments
99
By Mode of Supply By Range of Instruments
which can be supplied
Mode 1 Mode 3 Narrow * Broad
Capacity Building
Improved transparency/information Weak Strong Weak Strong
Incentive to improve regulation/ supervision Weak Strong Weak Strong
Infrastructure/ market development Weak Strong Weak Strong
Risk management Weak Strong Weak Strong
Capital Flows
More capital flows Yes Limited ** **
Bias toward short-term lending Strong Weak Possibly strong Weak
Increased volatility Strong Weak Possibly strong Weak
Efficiency/local benefits
More competition/efficiency Strong Strong Weak Strong
Skills/technology transfer Weak Strong Weak Strong
Local employment creation Weak Strong weak Strong
* Commitments exclude or limit provision of important instruments/allow only lending and deposit-taking.
** Depends on the instrument and mode of supply permitted, and market conditions
98 Eswar S. Prasad, Effects of Financial Globalization on Developing Countries, Some
Empirical Evidence, IMF (2003), p. 1. Also see Arturo Galindo (2002), “Financial
Liberalization: Does It Pay to Join the Party? [with Comments]”, Economía, Vol. 3,
No. 1.
99 Adopted from Masamichi Kono and Ludger Schuknecht (1998), Financial Services
Trade, Capital Flows, and Financial Stability, World Trade Organization Economic
Research and Analysis Division, Staff Working Paper ERAD-98-12.
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In light of the severe financial turmoil over the last few years, some countries
could have pursued a more cautious approach to capital account convertibility
and financial services trade.
100
Rather than dismantling barriers to trade in
financial services across-the-board, it might have been preferable for them to at
least maintain restrictions under Mode 1. This applies primarily to countries
with weak financial systems. For these countries, they caution against modal
neutrality, i.e., equal liberalization commitments between, for example, cross-
border supply and supply through commercial presence.
While in their view, “…countries with stable financial systems and a sound
macroeconomic and regulatory framework have every reason to apply a very
broad liberalization strategy and commit to far-reaching trade liberalization
across all modes of supply,” they recognize that in countries with weak financial
systems potentially volatile capital flows can be highly destabilizing, resulting
in banking and currency crises.
101
Thus, with respect to these countries they
counsel to confine commitments to the commercial presence of foreign
institutions, requiring only limited liberalization of capital flows in the GATS
context”.
102
Hence, for Ethiopia it seems preferable to save this policy space
against GATS Mode 1 commitments in financial services until the necessary
domestic capacity in regulatory capacity and a sound economic setting are
created.
3.2. Problems in Balance of Payments
3.2.1. General features of BOP and policy options
An unsustainable Balance of Payments (BOP) situation in a given country may
arise for a number of reasons and the risk of its aggravation onto a BOP crisis is
always a possibility.
103
One example of an unsustainable current account
position is when the current account is in deficit, and the net imports of goods
and services cannot be financed with a sufficient inflow of foreign capital or a
reduction in foreign reserves. This may lead to an unsustainable BOP
situation.
104
The policy options available include improving the current account,
100 Peter K. Cornelius, supra note 75.
101 Ibid.
102 Ibid.
103 C. Thomas (2000), “Balance-of- Payments Crises in the Developing World:
Balancing Trade, Finance and Development in the New Economic Order”, Am. U.
Int’l L. Rev. IV.
104 World Trade Organization, Concept Paper On Balance-Of-Payments Safeguards,
Working Group on The Relationship Between Trade And Investment,
Communication From The European Community and its Member States,
WT/WGTI/W/153, (2002) p 2.
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for instance by expanding exports or restricting imports (provided these
restrictions are compatible with its international obligations
and
preferably not
counterproductive
in
terms
of
future developmental objectives) etc. “In seeking
to avoid serious BOP difficulties, governments have sometimes taken restrictive
measures on current transfers as well as on capital movements”.
105
As discussed above, GATS Art XI mandates WTO members to allow
movement of capital in line with the commitment obligations of the Member
state. In principle, a member’s market access commitments oblige it to allow a
certain degree of capital mobility specifically, when the cross-border
movement of capital is an essential part of the service itself and inflows of
capital are related to commercial presence. Nevertheless, the agreement allows a
member to impose restrictions on current or capital transactions in the event of
serious balance of payments or external financial difficulties or the threat
thereof.
106
This is what is stated under Art XII of the GATS Agreement,
(Restrictions to Safeguard the Balance of Payments).
107
To a very large extent, this article applies the same terms, conditions and
procedures defined by the GATT for the invocation of Balance-of-payments
Safeguards Provisions.
108
As in GATT Article XVIII,
109
there is recognition in
105 Ibid.
106 The GATT also contains similar provisions that address financial stability concerns
regarding a member’s right to derogate from liberalization commitments when it is
suffering a severe balance of payments imbalances. See General Agreement on
Tariffs and Trade (GATT) Articles XII and XVIII:B.; Also see Annex 1A of the
Marrakech Agreement, Multilateral Agreements On Trade In Goods, Understanding
on the Balance-of-Payments Provisions of the General Agreement on Tariffs and
Trade (1994).
107 Article XII Restrictions to Safeguard the Balance of Payment; (1) states - “In the
event of serious balance-of-payments and external financial difficulties or threat
thereof, a Member may adopt or maintain restrictions on trade in services on which
it has undertaken specific commitments, including on payments or transfers for
transactions related to such commitments…” Importantly, sub-article 3 provides, -
“In determining the incidence of such restrictions, Members may give priority to the
supply of services which are more essential to their economic or development
programmes. However, such restrictions shall not be adopted or maintained for the
purpose of protecting a particular service sector.”
108 See GATT Art XII.
109 See Article XV paragraphs 4 and 9. Paragraph 4 specifically provides: “Contracting
parties shall not, by exchange action, frustrate the intent of the provisions of this
agreement…” Article XV, Paragraph 9(a) provides Nothing in this Agreement shall
preclude: (a) the use by a contracting party of exchange controls or exchange
restrictions in accordance with the Articles of Agreement of the International
Monetary Fund …
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the GATS that a developing country Member may need to use trade restrictions
in order to ensure the maintenance of a level of financial reserves adequate for
the implementation of its programme of economic development, and in the
GATS this provision extends also to economies in transition.
110
Generally, in the
event of serious balance-of-payments and external financial difficulties or threat
thereof, a Member may restrict trade in services on which it has undertaken
specific commitments, including on payments or transfers for transactions
related to such commitments.
111
The restrictions should be non-discriminatory,
consistent with the IMF Articles of Agreement, temporary and phased-out
progressively. Such restrictions should also avoid unnecessary damage to the
commercial, economic and financial interests of other Members, should not
exceed what is necessary to address the balance-of-payments problem, and
should not be used to protect specific industries or sectors.
112
A number of important features of Article XII are worth noting. First of all,
Article XII:1 clearly gives WTO Members with developing or transitional
economies an autonomy to take measures that provide a level of financial
reserves “adequate” for that particular Member’s programme of economic
transition or development. Thus, Art XII:1 affirms that development goals are
the legitimate basis for a WTO Member in determining the kinds of balance of
payments measures it needs. Whereas the measures must “not exceed those
necessary” to deal with “serious balance-of-payments and external financial
difficulties or threat thereof,” Art XII: 3 affirms that a Member “may give
priority to the supply of services which are more essential to their economic or
development programmes.” The concept of “necessity” ought to be interpreted
in the context of Art XII as a whole, which gives considerable emphasis to an
individual Member’s approach to development. There is also ample room to
110 WTO, Concept Paper On Balance-Of-Payments Safeguards, Communication From
The European Community And Its Member States, WT/WGTI/W/153 (28
November 2002) p 4.
GATS Art XII (1) second sentences which states “It is recognized that particular
pressures on the balance of payments of a Member in the process of economic
development or economic transition may necessitate the use of restrictions to ensure,
inter alia, the maintenance of a level of financial reserves adequate for the
implementation of its programme of economic development or economic transition.”
111 For instance the GATT interpretive notes make clear that the intent of paragraph 4 is
not to limit the ability of countries to impose exchange controls when they are
considered warranted by the IMF, but rather to ensure that countries do not use
exchange actions as a way to get around the intent of the substantive GATT
provisions such as those in Article XI.
112 World Trade Organization
(2002), Exceptions and Balance-Of-Payments Safeguards,
Note by the Secretariat, Working Group on the Relationship between Trade and
Investment, WT/WGTI/W/137, p 8.
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read Art XII so as not to require a Member to use alternative policy measures,
even if less restrictive of services trade, where those measures undermine the
objectives set by the Member’s development program.
113
At this juncture, reading GATS Art XII together with the language of XI: 2,
indicates an extremely important difference between GATT and GATS. That is,
no matter how narrowly or restrictively interpreted, the relevant provisions of
the GATT contain only disciplines on ‘current account’ measures. However,
under GATS, a Member’s specific commitments may not prevent it from
instituting ‘capital account’ controls. This nature of GATS Art XI & XII
exceptions makes it one of the most important provisions that install policy
space and flexibility into the system.
114
The imposition of restrictions on current or capital transactions in the event
of serious balance-of payments and external financial difficulties or the threat
thereof is thus generally permitted. This would allow members in serious
balance of payments difficulties – or threatened by such difficulties – to restrict
trade in services for which they have undertaken market accesses commitments.
Hence, such restrictions may be utilized by developing countries, or countries in
transition, if such measures are necessary to maintain a level of reserves
adequate for the prudent management of their economies.
115
These restrictions,
however, must not discriminate among members, cause unnecessary damage to
the trading interests of other members, or be unnecessarily restrictive, and
should be temporarily phased out as the situation improves.
116
Although the
restrictions may possibly focus on a particular sector, they must not be used or
maintained as a protectionist trade barrier.
117
It is also important to notice the
113 Robert Howse (2008), Pursuing Sustainable Development Strategies: The case of the
balance of payment rules in the WTO, NYU Law School, pp 26 -27.
114 Ibid.
115 Kern Alexander (2003), The World Trade Organization and Financial Stability: The
Balance between Liberalization and Regulation in the GATS, Cambridge
Endowment for Research in Finance, p 20.
116 General Agreement on Trade in Services (GATS) Art XII sub 2 primarily mentions -
(c) shall avoid unnecessary damage to the commercial, economic and financial
interests of any other Member; (d) shall not exceed those necessary to deal with the
circumstances described in paragraph 1.
117 Generally, the burden of proof while invoking the prudential carve out - like any
exception - rests with the country taking the prudential measure. Accordingly, the
prudential exception is limited by certain good faith requirements including the
requirement that ‘such measures shall not be used as a means of avoiding the
Member’s commitments or obligations under the Agreement’. See Anne van Aaken
and Jurgen Kurtz, Prudence or Discrimination? Emergency Measures, The Global
Financial Crisis and International Economic Law, Journal of International
Economic Law 12(4), 859–894, p 876 Also see Bart De Meester, The Global
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institutional accountability framework as restrictions adopted pursuant to Article
XII must be reviewed periodically by the WTO Balance of Payments
Committee.
118
3.2.2. The Ethiopian Case
Ethiopia has experienced chronic balance of payments difficulties since the
Imperial era, with the exception of a few periods.
119
The major factor in the
deteriorating balance of payments was and still is the worsening situation of
merchandise trade. This situation persisted for decades and the trade deficit that
existed during the imperial years continued to grow after two revolutions,
despite the introduction of various adjustment measures including import
controls or export promotion.
120
A typical means by which foreign financial institutions can exacerbate the
above situation and hence cause greater financial instability is by lending in
foreign currencies. This leads to the payment and repayment of loans in foreign
exchange which increases the rate of inflow and outflow of international capital.
When this results in an imbalanced exchange between local and foreign
currencies, it puts the exchange rate and foreign exchange reserves under
pressure, particularly if the loans are short-term. Thus, “too much demand for
foreign exchange increases the balance of payments deficit and with it the risk
of exchange rate and financial instability”.
121
What is said to be difficult to predict after liberalization efforts have been
undertaken is “how branches or subsidiaries of foreign financial firms and their
headquarters will behave in times of financial crises”
122
especially in
developing countries.
123
Various studies have been undertaken to evaluate
Financial Crisis and Government Support For Banks: What Role For the GATS?,
Journal of International Economic Law 13(1), 27–63
118 Article XII sub 5.
119 National Bank of Ethiopia, Annual Report - 2008/9, Economic Research and
Monetary Policy Directorate, 2009, pp. 3, 62.
120 a-
balance_of_payments_and_foreign_assistance.html>
121 M. Vander Stichele (2004), Critical Issues In The Financial Sector, SOMO sector
report (full report at www.somo.nl: publications), (2004) p. 19; Also see A.
Cornford, The WTO negotiations on financial services : current issues and future
directions, Paper for the Financial Markets Center.
122 Halfan Mkiwa (2007), The Anticipated Impact of GATS on The Financial Service
Industry In Africa, University Of The Western Cape-Cape Town, South Africa, p.
59.
123 Generally see Thomas, Chantal (2000). Balance-of-Payments Crises in the
Developing World: Balancing Trade, Finance and Development in the New
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whether foreign source capital and its holders would panic and abruptly move
out upon the first signs of crisis as they did in East Asia in 1997? “Or will they
be able to resist the crisis with capital flowing in from the headquarters?”
124
In the late Argentinean crisis, studies have shown that “foreign banks refused
to recapitalize their branches and subsidiaries”.
125
Most East Asian countries
have not been able to borrow in their own currency, which means “that they are
continuously exposed to problems that triggered the crisis in 1997”.
126
Generally, current empirical studies in relation to banking crises have been able
to identify “channels of transmission through which financial liberalization may
exert an influence on banking stability”.
127
Considering the above, it might be wise to expect that smaller economies
such as Ethiopia can be more vulnerable to capital movements that result in
financial volatility and destabilization of domestic bank credit.
128
In the GATS
accession offers and negotiations, it is important to consider that cross-border e-
banking and buying foreign products – or even securities – through internet,
129
Economic Order. American University International Law Review 15, no. 6, p 1249-
1277.
124 See Myriam Vander Stichele, The Risks of Financial Service Liberalization For
Financial Stability,
125 Generally however empirical evidence for developing countries is in favor of a
“stability-enhancing” role for international banks in periods of local financial crises.
See Christian Tietje et al, supra note 85, p 12.
126 Halfan Mkiwa, supra note 122 above. Or on the other hand, other studies in relation
to the recent financial crisis has shown the reverse of the above situation. According
to Ibrahim Zeidy, “The financial meltdown suffered by the parent banks following
market capitalisation losses was not passed down to their African subsidiaries. In
fact, some subsidiaries of foreign banks saw considerable increases in their market
capitalisation. For example, Swaziland Ned bank, Bank of Africa Benin and
Standard Bank of Ghana saw their market capitalisation increase between July 2007
and January 2009. Therefore, the contagious effect of the financial meltdown is
weak compared to the effect on parent banks”
ents/Knowledge/Financial%20
crisis_Impacts%20on%20Africa.pdf
>
(last accessed: May 2012) Also see AfDB,
The Current Financial Crisis: Impact on African Economies, Briefing note prepared
for Ministerial Conference on the Financial Crisis, Nov, 12, 2008.
127 J.-P. Allegret, B. Courbis, Ph. Dulbecco (2003), Financial Liberalization and
Stability of the Financial System in Emerging Markets: The Institutional Dimension
of Financial Crises, Review of International Political Economy, Vol. 10, No. 1
(Feb., 2003), p 75.
128 Normally, foreign banks may repatriate all the profits to the parent country.
Moreover, if lending rates rise in the parent country and/or profit rates decline in the
host country, foreign banks may withdraw their investment.
129 This would be ‘Mode 1’ under GATS.
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typically involve cross-border capital movements and foreign currencies which
puts the country at potentially risky situations. Ethiopia is thus expected to
negotiate the appropriate undertaking considering the existing overall situation
by prudently avoiding risks and distinguishing between what limitations should
be sought after and which ones should not. This is because some kinds of
(outbound) capital controls might be viewed as conditions which should be
bound under GATS schedules of commitments.
Typical instances are, conditions on who can supply services (number of
service suppliers) in violation of XVI: 2(a), or as “limitations on the total value
of service transactions or assets” in violation of XVI: 2 (b) or “total number of
service operations or the total quantity of service output” in violation of
XVI:2(c). This possibility arises from the extremely broad interpretation of
XVI:2(a) and (c) by the Appellate Body in the US-Gambling case.
130
The
Appellate Body suggested that to violate either provision, measures need not
take the explicit forms described in those provisions provided they have
comparable effects on restricting market access and are quantitative in nature.
131
Since capital account controls are clearly measures that are quantitative in
nature they may well have effects on the number of service suppliers, the total
value of services transactions or assets under Art. XVI.
132
However, speaking of
GATS rules, we can say that GATS provisions provide the Ethiopian
Government with sufficient domestic policy space to implement its financial
stability objectives.
3.3. Macroeconomic Policy
Despite an overwhelmingly broad understanding of services in the WTO and
hence GATS, the services supplied in the exercise of governmental authority,
including activities conducted by a central bank or monetary authority or by any
other public entity in pursuit of monetary or exchange rate policies are entirely
excluded from the scope of the GATS.
One of its principal provisions in the discussion of financial services is
GATS Article I. This provision excludes services supplied in the exercise of
governmental authority, the activities of central banks or other authorities
carrying out monetary or exchange rate policies. GATS Art I:3 (b) provides that,
‘services’ includes any service in any sector except services supplied in the
exercise of governmental authority. According to Art I:3 (c); ‘a service supplied
in the exercise of governmental authority’ means any service which is supplied
130Appellate Body Report, United States - Measures Affecting the Cross-Border Supply
of Gambling and Betting Services, (WT/DS285/AB/R), Report of the Appellate
Body, paragraphs 232, 247.
131 Ibid.
132 Robert Howse, supra note 113, pp 6-7.
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neither on a commercial basis, nor in competition with one or more service
suppliers. In the words of, Patrick Low and Aaditya Mattoo, et al, “when a
central bank conducts open market operations, for example, conditions in the
financial sector could be affected through the impact of such interventions on
the money supply, interest rates or exchange rates. These types of interaction
fall entirely outside the ambit of the GATS.”
133
The exclusion of foreign service suppliers also extends to activities which
form part of statutory social security or public retirement plans, or other
activities that are carried out by a public entity on behalf of the government, or
using government financial resources, provided that domestic non-governmental
financial suppliers are also not allowed to take part in these activities.
134
The
agreement also allows a member to pursue other domestic policy objectives
through, for instance, directed lending programs, provided that the measures are
neither discriminatory nor intended to restrict the access of suppliers to a
market.
135
In the Ethiopian context, the National Bank of Ethiopia regulates the money
supply, interest rates, exchange rates or various other macroeconomic
functions.
136
Considering the central place that these measures have in the on-
going economic policy in the country, the National Bank of Ethiopia and other
relevant government agencies will still be able to maintain such kind of
macroeconomic activities after accession irrespective of the form of accession
commitments the country has granted. This is mainly because, services supplied
in the exercise of governmental authority, including activities conducted by a
national bank, central bank or monetary authority or by any other public entity
in pursuit of monetary or exchange rate policies are excluded from the scope of
the GATS.
137
Another instance is where the Ethiopian government may wish to maintain
other rules and regulations that influence the operations of markets and
competition in market, such as for example, a requirement to lend to certain
133 Patrick Low et al (1997), “Opening Markets in Financial Services and the Role of
The GATS”, WTO Special Studies, p 3.
134 General Agreement on Trade in Services, Annex on Financial Services Art 1 (b),
Scope and Definition.
135 Rudolf Adlung et al (2002), The GATS: Key Features and Sectors (in) Bernard
Hoekman et al (eds.), Development, Trade, And The WTO: A Handbook, The World
Bank, Washington, D.C. pp 259-279.
136 Proclamation No. 591/2008, Articles 5 (4), 5 (5-6 and 9-10) and 19-21; and See
National Bank of Ethiopia (2007), Interest Rates Directive No. NBE/INT/10/2007.
137 General Agreement on Trade in Services, Art I: 3, General Agreement on Trade in
Services, Annex on Financial Services Art 1 (b), Scope and Definition. Also see,
Wendy Dobson, supra note 84 above.
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sectors or individuals, or lending mandated on the basis of preferential interest
rates for certain types of lending. Even though such measures sometimes have
been argued against for not being the most efficient means of achieving
particular objectives, these policies are not necessarily subject to GATS
commitments. “If they are neither discriminatory nor intended to restrict the
access of foreign suppliers to a market, then such domestic regulatory measures
would be permitted provided they met certain basic criteria, such as impartiality
and objectivity”.
138
3.4. Financial Market Liberalization and Prudential Regulation
The aims of GATS can potentially provoke concern that its rules might
compromise the ability of governments to pursue legitimate regulatory and
prudent measures or might limit their freedom to achieve other domestic policy
objectives. Most of these concerns seem to have been already addressed under
GATS rules.
139
None of the GATS provisions prevent a member from taking measures for
prudential reasons, for example, to protect investors or depositors or to ensure
the integrity and stability of the financial system.
140
In particular, the prudential
‘carve-out’ for domestic regulation of financial services, under Art 2 of
Financial Services Annex, allows a country to take prudential measures for the
protection of investors, depositors, policy holders or persons to whom a
fiduciary duty is owed or to ensure the integrity and stability of the financial
system regardless of any other provisions of the GATS. Thus prudential
measures could, in principle, be inconsistent with a country’s national treatment
or market access commitments or its Most Favoured Nation obligation.
While these sorts of exceptions are common in the WTO Agreements,
141
the
prudential carve-out here differs from other exceptions for domestic policy
contained in the GATT and GATS in one very significant respect. In contrast to
health and safety, for example, where only ‘necessary’ measures can be raised
138 Wendy Dobson, Ibid, p 293; General Agreement on Trade in Services (GATS), Art
VI.
139 But see Lazaros E Panourgias, Banking Regulation and World Trade Law, GATS,
EU and ‘Prudential’ Institution Building, Oxford (2006) Chapter III.
140 There is no definition of what it means by ‘prudential’ objectives under GATS or
any of the other agreements under the WTO. For the moment this is left for the
GATS adjudicatory body (dispute settlement body) to interpret what sort of
measures fall under this notion.
141 See Art XX of General Agreement on Tariffs and Trade, General Exceptions, Art
XXIV of GATS General Exceptions, Agreement on Trade-Related Aspects of
Intellectual Property Rights, Art 73, and Security Exceptions etc.
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as an exception under Article XXIV of GATS,
142
here all prudential measures
are exceptions to the rule under GATS Art XI and hence can be claimed without
the need to prove necessity.
143
As a result, a prudential measure may not be
challenged on the ground that it is not ‘necessary’ or ‘least trade restrictive.’
Moreover, “the prudential carve-out overrides the requirements for domestic
regulations in GATS Article VI (Domestic Regulation)”.
144
3.4.1 The Ethiopian case
As discussed above, GATS recognizes that governments may find it necessary
to exercise considerable regulatory control over the activities of banks,
insurance companies and other financial institutions. Its Annex on Financial
Services therefore provides that the liberalization commitments undertaken
should not prevent them from taking measures for prudential reasons, including
the protection of investors, depositors, policy holders or to ensure the integrity
and stability of the financial system. Although the Annex does not give details
as to what constitutes prudential measures, licensing requirements intended to
ensure business competence and financial integrity, minimum capital
requirements and regular accounting requirements would ordinarily be
considered prudential measures. Accordingly the National Bank of Ethiopia
142 See for instance Art XXIV of GATS General Exceptions states; Subject to the
requirement that such measures are not applied in a manner which would constitute
a means of arbitrary or unjustifiable discrimination between countries where like
conditions prevail, or a disguised restriction on trade in services, nothing in this
Agreement shall be construed to prevent the adoption or enforcement by any
Member of measures: (a) necessary to protect public morals or to maintain public
order; (b) necessary to protect human, animal or plant life or health; (c) necessary to
secure compliance with laws or regulations which are not inconsistent with the
provisions of this Agreement..
143 Meester, B.de, Testing European Prudential Conditions for Banking Mergers in
Light of Most Favoured in the GATS, Journal of International Economic Law II
(2008) pp 609-647.
144 Sydney J. Key (2003), supra note 63 above. She reiterates, “The absence of a
necessity test does not, however, resolve the issue of whether a measure is prudential
or is being used to avoid the obligations of the agreement. An allegedly prudential
measure that violates a country’s obligations or commitments under the GATS
might be challenged on the grounds that its purpose is really trade restrictive rather
than prudential and therefore it does not fall within the scope of the prudential carve-
out.” Also See Diemo Dietrich et al (2010), Liberalization and Rules on Regulation
in the field of Financial Services in Bilateral Trade and Regional Integration
Agreements, Institute of Economic Law (TELC), Martin Luther University Halle-
Wittenberg, p. 12.
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(NBE) can keep regulating financial institutions in the above terms after
accession irrespective of any commitment scenario upon accession.
Below is a brief review of some of the major prudential regulatory measures
that are currently being practised under the supervision of the National Bank of
Ethiopia.
145
A brief evaluation is made whether these measures can be
accommodated within the bounds of GATS prudential carve-out thereby
allowing policy space for the government upon accession.
a) Establishment and structural requirements
Ethiopian law mandates private banks, insurers and Micro Financial Institutions
(MFIs) to be incorporated as share companies.
146
It, among others, mandates all
banks to get a banking business license, including branch permits, from the
National Bank of Ethiopia (NBE) and to notify the latter on their new branching
decisions to the latter.
147
A bank to which a license is granted is required to
“fulfill, before commencing operation, sound information management and
internal control systems, risk management policies and procedures, and human
resource organization and such other essential obligations to carry out banking
business as determined by the directive to be issued by the National Bank”.
148
The NBE is also authorized to impose qualification, fitness and propriety criteria
on influential shareholders of the banks and directors and on chief (and senior)
executives of the banks.
These establishment and structural requirements are compatible with the
GATS rules as long as they are based on objective and transparent criteria, not
145 It is beyond the purpose of this note to discuss the appropriate content of prudential
regulation or the means of adequate supervision of financial institutions. For a
detailed synthesis on the subject please see IMF, International Capital Markets,
IMF, Washington, D.C, (1998) This study describes the overall developments in
prudential regulation and banking supervision in the world. Major international
achievements have also been made by the various international institutions to
improve regulatory and supervisory standards across countries. In this regard the
activities of the Basle Committee on Banking Supervision in developing prudential
standards for banking are extensive and well-documented. See BIS, Core Principles
for Effective Banking Supervision, Basle Committee on Banking Supervision, Bank
for International Settlements, Basle (1997).
146 Primarily see Commercial Code of the Empire of Ethiopia, 1960, Title VI. Also see
Article 513; Proclamation No 592/2008, Article 4.
147 Proclamation No 626/2009, Article 6 (5); Proclamation No 592/2008, Article 3 (3) 1/
It is prohibited to transact banking business in Ethiopia without obtaining a banking
business license from the National Bank. 2/ No person shall use the word ‘bank’ or
its derivatives as part of the name of any financial institution unless it has obtained a
license from the National Bank.
148 Proclamation No 592/2008, Article 6.
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more burdensome than necessary to ensure the quality of service, and less trade
restrictive, as the GATS requires. But, with respect to the form and type of
organizations allowed to operate banking business, it seems wise to include the
rules under the Ethiopian Commercial Code and the Banking Proclamation in
the commitment schedules. For instance, Cape Verde maintained a market
access exception that commercial presence must take the form of a limited
liability company, or as provided for in the financial services head note of the
respective schedule.
149
This aspect of the regulatory system is out of the
exception given to measures falling under the prudential carve-out. This
objective can also be achieved by enlisting a general condition under the
financial services schedule whereby the concerned regulatory tools and the
institutions can easily be enlisted. For instance, the services schedule of Nepal
maintains the following:
“[T]he commitments in financial services are made in accordance with
the General Agreement on Trade in Services and the Annex on Financial
Services. All the commitments are subject to entry requirements,
domestic laws, rules and regulations and the terms and conditions of the
Nepal Rastra Bank (the central bank of Nepal) and any other competent
authority in Nepal, as the case may be, which are consistent with
Article VI of the GATS and paragraph 2 of the Annex on Financial
Services.”
150
b) Operational and disclosure requirements
Financial services providers in Ethiopia are generally obliged to comply with
directives issued by the National Bank on “minimum amounts of capital and
reserves to be maintained by banks and the rules for their computation” shall be
determined by the latter.
151
Article 29 of the Banking Proclamation also
empowers the National Bank to periodically or at any time, without prior notice,
make, or cause to be made, an on-site inspection of any bank. With respect to
disclosure rules, it is notable that transparency in the banking sector is,
compared to other sectors or the general commerce, better regulated and
monitored in the country. The National Bank of Ethiopia is given a mandate to
149 As discussed above in Section (3), the financial services head note maintains that
Cape Verde will permit the establishment of branches for committed sub-sectors in
insurance, banking and securities within 10 years from the date of Cape Verde's
Accession. See Cape Verde, Report of The Working Party on The Accession of Cape
Verde: Addendum, Part II - Schedule of Specific Commitments in Services List of
Article II MFN Exemptions, WT/ACC/CPV/30/Add.2.
150 World Trade Organizations, Trade in Services, The Kingdom of Nepal, Schedule of
Specific Commitments, GATS/SC/139 (2004).
151 Proclamation No 592/2008, Article 18.
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see into the compliance of these sectors with their disclosure and transparency
obligations.
152
Among many, the working regulation empowers the NBE to see
that banks keep records and accounts following international financial
statements standards,
153
to have their assets valued by government approved
experts, to have their accounts audited by independent auditors appointed upon
approval of the NBE or the government,
154
and to report the state of their
financial activities and affairs to the NBE, their customers and the general
public annually and as may be required by the NBE. The NBE is also authorized
to lay down auditing standards,
155
and impose an obligation on banking services
providers to provide their audited annual balance sheets and profit and loss
accounts in accessible places of businesses, etc.
156
Understandably, all these
measures are not incompatible with the GATS since they are meant to protect
the financial institutions, investors, consumers and the general public against
fraud.
c) Prudence and performance requirements
Article 18 of the Banking Proclamation empowers NBE to set the minimum
amounts of capital and reserves that should be maintained by banks and the
rules for their computation.
157
The same Proclamation provides that “the
National Bank may prescribe different capital and reserve requirements to be
maintained by different banks depending on their risk profile.”
158
Accordingly,
the NBE has issued various directives aimed at providing prudence and
performance requirements. They include Directive No. Sbb-50-11 on minimum
capital requirement for Banks, Licensing and Supervision of Banking Business,
Directive No. SBB/4/95 and SBB/37/2004 Reserve Requirement on Legal
Reserves, Licensing and Supervision of Banking Business, Directive No.
SBB/12/1996 Limitation on Investment of Banks, Directive No. SBB/39/2006
152 National Bank of Ethiopia Establishment (as amended) Proclamation No. 591/2008.
Micro-Financing Business Proclamation No. 626/2009.
153 Banking Business Proclamation No. 592/2008, Article 23.
154 Ibid, Article 24.
155 Banking Business Proclamation No. 592/2008 Article 26.
156 Generally see Article 28 (titled Disclosure of Information) of the Banking Business
Proclamation No. 592/2008. It provides the following: (1) Every bank shall, within a
time period to be determined by the National Bank, send to the National Bank duly
signed financial statements and other reports as prescribed by it. (2) Every bank
shall: a) exhibit at every place of its business, including its branches, in a
conspicuous place throughout the year, a copy of the last audited balance sheet and
profit and loss account in respect of all of its operations; b) cause such balance sheet
and profit and loss account, together with the notes thereto, to be published in a
newspaper of wide circulation.
157 Proclamation No 592/2008, Article 18.
158 Ibid.
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Amendment for New Bank Licensing on Approval of Directors and CEOs, and
Directive Sbb-44-08 Liquidity Requirement (3rd replacement). The Banking
Business Proclamation separates the banking businesses from non-banking and
other commercial activities and the insurance businesses from non-insurance
activities.
159
It also requires banks to adhere to single borrower limits to
diversify their investments as the NBE prescribes.
160
Having seen the nature of the above legal instruments and prudential
supervision from the National Bank, one might wonder whether GATS rules
will prohibit such kinds of government interventions in the financial sector. The
aforementioned regulations in Ethiopia are not incompatible with the GATS
since they have the purpose of protecting the prudence and stability of the
financial system against contagion and the GATS do not prescribe and impose
particular regulatory provisions on domestic regulations. It does not also put a
limit on the choice and preferences of how a member would like to discipline its
banks or the functioning of the entire economy as long as the measures
employed are not discriminatory and thus act as a disguised trade barrier.
161
On final note, if Ethiopia’s negotiators/regulators are concerned about
whether a particular measure would be generally accepted as prudential, there is
the option of listing that measure as a limitation when making initial market
access and national treatment commitments, thereby avoiding the need to rely
on the prudential carve-out. This seems preferable considering the different
positions of member states as to what sort of measures fall under the prudential
159 Proclamation No 592/2008, Art 22 (2), 50; Licensing and Supervision Of Banking
Business, Directive No. SBB/12/1996; which inter alia provides; 1, No bank shall
engage in insurance business but may hold up to 20% in an insurance company and
up to a total of 10% of the bank’s equity capital in such business. 2. Banks are
prohibited from engaging directly in non-banking businesses such as agriculture,
industry, and commerce. 3. A bank may hold shares in a non-banking business only
up to 20% of the company’s share capital and total holdings in such business shall
not exceed10%.
160 Proclamation No 591/2008, Art 15 (1) lit. a and (2); Proclamation No. 592/2008, Art.
22 (1); Proclamation No 86/1994, Arts 14, 42 lit. e and f; Proclamation No
626/2009, Arts. 3 (1), 14 (2) lit. a and d and 16; Directives National Bank of
Ethiopia, Licensing and Supervision of Banking Business Directive No SBB/16/1996
on Amendment of Single Borrower Loan Limit Directive No SBB/8/1995 (1996);
National Bank of Ethiopia, Licensing and Supervision of Banking Business Directive
No. SBB/29/2002 on Amendment of Single Borrower Loan Limit, 13 May 2002;
National Bank of Ethiopia, Licensing and Supervision of Insurance Business
Directive No SIB/25/2004 on Investment of Insurance Funds, (2004).
161 Bart De Meester (2010), The Global Financial Crisis And Government Support For
Banks: What Role For The GATS?, Journal of International Economic Law Vol. 13
No. 1, p 48.
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exception. For instance, some WTO members imposed lending and other
operating limits based on branch capital-equivalency requirements; Korea and
Turkey, for example, listed the measures as limitations in their schedules of
commitments, which could be interpreted as an acknowledgement that the
measures may not be generally accepted as prudential. By contrast, there are
members that imposed the measures but did not list them as limitations in their
schedules; Chile for example, clearly believed that the measures are within the
scope of the prudential carve-out.
162
The
EU
practice
shows that branches (as
opposed to subsidiaries) of third-country financial firms are, in general, not
subject to harmonized EU prudential measures and that each member state may
therefore impose its own measures for prudential purposes.
163
This shows that
members have different views towards what sort of measures are prudential and
thus need not be schedules based on the annex on financial services. Thus,
Ethiopia should not take any risk if a particular measure (which is not
anticipated during accession) can possibly be challenged on prudential grounds;
and should thus have it scheduled.
Conclusion
This article began with a brief discussion on the central role of the negotiation
on financial services in Ethiopia’s accession bid to the WTO. In doing so, the
article did not discuss the macroeconomic relevance and market efficiency
emplacements of financial services liberalization, whether within and outside
the WTO system. Rather the central inquiry in this article focused on whether
Ethiopia can maintain the existing status-quo and hold back on any GATS
commitments in financial services so as to retain the freedom to pursue certain
domestic policy and regulatory objectives.
These concerns are legitimate mainly for two reasons. Primarily, financial
services play key roles in any economy, including Ethiopia, while at the same
time the risk of market failures in the services sector is equally high. State
regulation in financial services is thus expedient. Acceding WTO member
countries such as Ethiopia make sure that the relevant WTO instruments are
flexible enough to allow sufficient level of macroeconomic and regulatory
autonomy. The second reason relates to the recent worldwide financial crisis
which clearly shows the potential vulnerabilities of the highly liberalized,
deregulated and overwhelmingly intermingled financial systems of the western
world. Important pressures have thus emerged pushing countries all over the
world to rethink and maintain the regulatory role of the government in the
financial services market.
162 See Sydney J. Key (2003), supra note 64.
163 Ibid.
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The discourse on the cause, nature and degree of these risks and their
ultimate solutions is still underway. No one can possibly know precisely where
and how the next global crisis will unfold or what measures national
governments should take to protect their economies from a global contagion. In
this extremely fluid and unpredictable situation, it is thus essential that
governments retain the necessary policy space.
With regard to Ethiopia’s WTO accession package, the evaluation of the
WTO framework and the GATS obligations in financial services demonstrates
that commitments under GATS need not compromise the ability of the
Ethiopian Government to pursue sound regulatory and macroeconomic policies.
A review of the relevant obligations in this article shows that states acceding to
the
system
will
still be left with considerable freedom to achieve macroeconomic
and regulatory policy objectives. After examining the possible commitment
scenarios which Ethiopia can possibly commit to, it is argued that there exists no
definite reason why GATS commitments on financial services will have to
compromise Ethiopia’s ability to pursue sound regulatory and macro-economic
policies.

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