More innovative approach for capital flow

It is a well-known fact in the economics descipline that the engines of economic growth are technological progress and capital accumulation. High-tech activities usually need skilled labor and use of large physical capital (machineries). It is not feasible to observe economic prosperity in a society with large number of machineries but with no know-how about the machines. The same is true for a society with many skills but doesn't have the resource to buy equipments. So any country's growth policy should put a clear strategy as to how to get its population more skilled and how to get the needed physical capital.

For a poor country like Ethiopia, foreign capital flows are one source. Besides foreign aid (needed to finance public investment), the government has put a lot of focus to attract foreign investors who can come with their capital and invest in Ethiopia. Such investments are called foreign direct investment (FDI).

The other route to access foreign capital is through financial markets. In this route, domestic private investors can access credit from international sources. For example, a domestic bank at home can borrow from a U.S. bank and lend the money to home investors (at a higher rate). Since foreign banks lend hard currencies (like US dollar, Euro,etc), this route also opens more access to foreign exchange. The problem with this route arises if the foreign lenders want to withdraw their asset, leading to a sudden loss of foreign exchange reserve and potential currency crises. And it is mainly due to this fear that the government forbids foreign banks to work in Ethiopia. Though the ban helps to avoid such sudden capital flight, it also comes at a cost: a potentially important door to access capital is closed. In stead of just shutting the door to outside lenders, the National Bank needs a more innovative approach that allows access to the international capital market while at the same minimizing the risk of capital flight.