MoFA IF and FI Presentation NEW

International Finance and Institution
Amare Abawa (PhD)
Training to Councilor I, FDRE MoFA

Economic/Commercial Diplomacy
• Is the use of government recourses to promote the growth of a
country’s economy by;
• Increasing trade,
• Promoting investments,
• Collaboration on bilateral and multilateral trade agreements
• In a broad sense, it can be defined as any diplomatic activity that
promotes the state’s economic interests.
• Current trends include;
• Increasing collaboration between state and non-official agencies, and
• Increased importance given to WTO issues,
• The negotiation of free trade and preferential trade agreements,
• Double taxation avoidance, and alike.
2
• It is a two sides of economic diplomacy
• Use of economic policies to achieve a foreign policy objective (e.g. aid
diplomacy)
• Use of diplomacy to achieve country’s economic objectives
• Inclusion of economic elements into foreign policy and diplomacy
• Preference to economics over politics in diplomacy and foreign policy
• Economic interests have started to become political interests
• When economic interests converge- political interests converge as well
Factors behind importance of Economic
Diplomacy
• Shrinking political differences among nations- priority to economic issues
• Wave of liberalization, deregulation, globalization and economic
interdependence and integration
• Increasing economic competition
• Global economic and financial crises
• Emergence of new international financial architecture
• Search for new paradigms in foreign policy and diplomacy
Levels of Economic Diplomacy
• Where and when the commercial diplomacy will be taken place?
• All four levels are important
• National
• Bilateral
• Regional
• Multilateral
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4. What
International finance: Basic concepts
• International Finance is the branch of financial economics broadly concerned with
monetary and macroeconomic interrelations between two or more countries.
• It examines the dynamics of;
• Global financial system,
• International monetary systems,
• Balance of payments,
• Foreign direct investment, and
• how these topics relate to international trade.
• Investors and multinational corporations must assess and manage international
risks such as political risk and foreign exchange risk, including transaction
exposure, economic exposure, and translation exposure (Culture, language,
context)
International Finance Environment
• Even if a condition or event explains in a single country, the influence
of that country's economy has the potential to move the markets
around the world.
• An international financial environment represents the conditions for
activity in the economy or in the financial markets around the world
• Sometimes, macroeconomic events occur that cause a ripple effect
throughout the international financial environment
“Each Word of Trump's Tariff Tweets Wiped $13 Billion Off Stocks”
Divya Balji and Matthew Burgess, Bloomberg

International financial flows
• International financial flows are the set of financial transactions.
• These flows serve international trade in goods and services, and
capital reallocation between countries.
• Financial flows contribute to the expansion of the types of foreign
exchange transactions, foreign investment, activation of securities
transactions and other financial instruments, by providing
international redistribution of financial resources

Goals of International Finance
1 • To expand production capacities
2 • To achieve higher rate of profits

• To escape severe competition in the home
3
country
4 • To escape limited home market opportunities
5 • To enjoy Political stability and avoid political instability

Goals of International Finance
• To enjoy availability of technology and skilled human
1
resources
2 • To avoid high cost of transportation

• Nearness to raw materials
3
• To access quality human resources
4 • To enjoy Liberalization and globalization

Challenges in the international finance
Think of Ethio Telecom
https://www.ethiotelecom.et/history/
• Now, assume Ethio Telecom want to operate in a foreign country.
Consider the situation in the country you currently reside representing
your country.
• Discuss possible challenges Ethio telecom could face if decide to operate
in these countries

Challenges in International Finance
1 2 3 4
• Tariff and non-tariff
• Varied trade barriers • Environmental • International
safeguards Taxation
Economic
Systems

1. What is a global financial system?
• The global financial system is the worldwide framework of legal
agreements, institutions, and both formal and informal economic
actors that together facilitate international flows of financial capital
for purposes of investment and trade financing
• This is the interplay of financial companies, regulators and institutions
operating on a international level
• The global financial system can be divided into regulated entities
(international banks and insurance companies), regulators,
supervisors and institutions
When the global financial system has
emerged?
• Birth of the global financial system is directly connected to the
growth of international economic relations
• International trade in a global scale started in the late 19th century
• International trade is complicated by the fact that most nations
have their own currency, and that the rules and regulations
governing financial transactions vary widely between countries
Evolution of the global financial system
• Late 19th – early 20th centuries – little coordination of international finances
• Gold standard – financial obligations were settled in currencies redeemable in gold
• World War I involved vastly larger international capital flows than ever before
• European nations such as Britain and Germany went deeply in debt, borrowing heavily from other
nations, especially the United States
• The Great Depression of the 1930s resulted partially from sharply declining
international trade caused, in part, by high tariffs
• World War II disrupted world trade and led to international cooperative
arrangements to facilitate economic stability and growth
Evolution…
• 1944 – Bretton Woods Conference
• John Maynard Keynes and Harry Dexter White successfully proposed a new
international financial order
• The International Monetary Fund (IMF) and the International Bank for Reconstruction
and Development (World Bank) were created
• Dollar was established as a main reserve currency (Keynes had argued against the
dollar having such a central role in the monetary system, and suggested an
international currency called Bancor used instead)
• 1947 – General Agreement on Tariffs and Trade (GATT - WTO)
• Dramatic reductions in barriers to international trade
• Led to the creation of a system of international financial arrangements and deeper
economic / financial integration (especially EU, North America Free Trade Agreement
(NAFTA)
• 1971 – Dollar’s convertibility into gold was suspended
• 1973 – Abandonment of fixed exchange rates
International reserve currency
• A reserve currency is a large quantity of currency maintained by central
banks and other major financial institutions to prepare for investments,
transactions, and international debt obligations, or to influence their
domestic exchange rate
• Holding a reserve currency minimizes exchange rate risk, as the
purchasing nation will not have to exchange its currency for the current
reserve currency to make the purchase.
• Since 1944, the U.S. dollar has been the primary reserve currency used
by other countries.
• As a result, foreign nations closely monitor the monetary policy of the
United States to ensure that the value of their reserves is not adversely
affected by inflation or rising prices
Historic role of reserve currencies
• No reserve currency has ever been permanent
• Reserve currencies reflects political power and authority
• UK pound sterling is a reserve currency for more than 100
years
• The exorbitant privilege refers to the benefit the country has in
its currency being the international reserve currency: this
country would not face a balance of payments crisis, because
it purchased imports in its own currency (concept created by
Valerie Giscard d’Estaing)
The exorbitant privilege for euro?
• European Central Bank data indicates that the euro’s share in
international currency use stands at about 19 per cent.
• While this is lower than the dollar’s share, at around one-half, it remains
well ahead of any other currency
• International use of the currency has stalled over the past decade, and
not all eurozone countries have profited from the “privilege” of lower
borrowing costs in global capital markets, especially in times of
heightened risk aversion because the euro area is characterized by
market segmentation and a limited supply of what are perceived to be
safe assets.
Global financial system based on US dollar
• The U.S dollar was officially crowned the world’s reserve currency and was
backed by the world’s largest gold reserves thanks to the Bretton Woods
Agreement.
• Instead of gold reserves, other countries accumulated reserves of U.S.
dollars.
• Needing a place to store their dollars, countries began buying U.S. Treasury
securities, which they considered to be a safe store of money.
• The demand for Treasury securities, coupled with the deficit spending
needed to finance the Vietnam War and the Great Society domestic
programs, caused the United States to flood the market with paper money.
• With growing concerns over the stability of the dollar, the countries began to
convert dollar reserves into gold
Global financial system based on US dollar…
• Today, the dollar remains the world's reserve currency
• Central banks hold around 59% of their reserves in U.S. dollars, according to
the International Monetary Fund (IMF). Many of the reserves are in cash or
U.S bonds, such as U.S. Treasuries.
• Dollar-denominated debt outside the U.S. continues to rise, with levels
reaching $13.4 trillion as of mid-2022
• Most people would believe that this makes the dollar the strongest currency in the
world.
• Despite its position in the global markets and how dependent they are on it,
the dollar ranked as the 10th strongest currency, according to CMC Markets.
• The Kuwaiti dinar is ranked as the strongest currency while the British pound
and the euro earned the fifth and eighth spots respectively
Whose currency could be the world’s next
reserve currency
• There are a series of alternatives that could replace the dollar
as the next global reserve currency.
• The euro is the most used reserve after the dollar and could
replace the dollar if economic conditions move in its favor.
• But the European Union (EU) does lack a central Treasury
unit, which can make this difficult.
• China's renminbi could surpass the dollar, a goal that the
country's leaders are keen on realizing
What determines currency strength?
• A currency's strength is determined by the interaction of a variety of
local and international factors such as;
• The demand and supply in the foreign exchange markets;
• The inflation and growth in the domestic economy; and the country's
balance of trade
• A country with a high demand for its goods tends to export more than
it imports, increasing demand for its currency

Institutions of global financial system
• International Institutions
• IMF - keep account of international balance of payment of members states, also acts as lender of last
resort
• World Bank - provide funding, take up credit risk and offer financial favorable terms to development
projects in developing countries
• WTO - negotiate international trade agreements, settles trade disputes
• Bank for International Settlements (BIS)
• Institute of International Finance (IIF)
• Government institutions
• Financial ministries, tax authorities, central banks, securities and exchange commissions, etc.
• Private participants
• Commercial banks, pension funds, hedge funds, etc.
• Regional institutions
• Eurozone, NAFTA, etc
Bank for International Settlements
• is an intergovernmental financial organization of central banks which fosters
international monetary and financial cooperation and serves as bank for
central banks
• Regulates capital adequacy
• Encourages reserve transparency
• Leads the changes of banking regulation and supervision through the Basel
Committee on Banking Supervision passing global regulatory standards
• The Basel Committee on Banking Supervision (BCBS) is the primary global
standard setter for the prudential regulation of banks and provides a forum
for regular cooperation on banking supervisory matters.
• Its 45 members comprise central banks and bank supervisors from 28
jurisdictions.
Institute of International Finance
• is the world’s global association of financial institutions
• Providing analysis and research to its members on emerging
markets and other central issues in global finance
• Developing and advancing representative views and constructive
proposals that influence the public debate on particular policy
proposals, including those of multilateral agencies, and broad
themes of common interest to participants in global financial
markets
• Coordinating a network for members to exchange views and offer
opportunities for effective dialogue among policymakers,
regulators, and private sector financial institutions
Case 3: MoFA\Ethiopian Cases\Case 3.pdf
How is Brazil doing? Is the optimism in the Brazilian Economy justified? What
are the internal and external challenges the country is facing?
1. After you read the case #3 thoroughly, answer the following questions;
2. How is Brazil doing? What challenges, internally and externally, is the
country facing?
3. If the country you represent ask your advise, would you suggest to buy
a Brazilian bond in July 2011? How would you make your decision?
What other information would you like to have? Would you buy a
Brazilian bond in August 2012? What has changed?
4. Are capital controls a good strategy for emerging markets such as
Brazil? Will they help solve the challenges the country is facing? What
other policies should Brazil implement?
2. The International Monetary System
• The International Monetary System (IMS) constitutes an integrated set of money
flows and related governance institutions that establish the quantities of money,
the means for supporting currency requirements and the basis for exchange
among currencies to meet payments obligations within and across
countries.
• Central banks, international financial institutions, commercial banks and various
types of money market funds along with open markets for currency are all part of
the international monetary system
• The purpose of the international monetary system is to facilitate international economic
exchange.
☂ International Financial Markets
• The International Financial Market is the place where financial wealth is

traded between individuals (and between countries).
• It can be seen as a wide set of rules and institutions where assets are
traded between agents in surplus and agents in deficit and where
institutions lay down the rules.
• The financial market comprises stock market, bond market, currency
market, etc and the institutions which work in them with different
aims and functions
Motives for Using International Financial Markets
• The markets for real or financial assets are prevented from

complete integration by barriers such as tax differentials,
tariffs, quotas, labor immobility, communication costs, cultural
differences, and financial reporting differences.
• Yet, these barriers can also create unique opportunities for specific geographic
markets that will attract foreign investors.
Motives…
• Investors invest in foreign markets:
• To take advantage of favorable economic conditions;
• When they expect foreign currencies to appreciate against
their own; and
• To reap the benefits of international diversification.
Motives…
• Creditors provide credit in foreign markets:
• To capitalize on higher foreign interest rates;
• When they expect foreign currencies to appreciate
against their own; and
• To reap the benefits of international diversification.
Motives…
• Borrowers borrow in foreign markets:
• To capitalize on lower foreign interest rates; and
• when they expect foreign currencies to
depreciate against their own.
Foreign Exchange Markets
• The foreign exchange market allows currencies to be
exchanged in order to facilitate international trade or
financial transactions.
• The system for establishing exchange rates has
evolved over time.
• From 1876 to 1913, each currency was convertible into
gold at a specified rate, as dictated by the gold standard.
Foreign Exchange….
• This was followed by a period of instability, as World War I
began and the Great Depression followed.
• The 1944 Bretton Woods Agreement called for fixed currency
exchange rates.
• By 1971, the U.S. dollar appeared to be overvalued.
• The Smithsonian Agreement devalued the U.S. dollar and
widened the boundaries for exchange rate fluctuations from
±1% to ±2%.
Foreign Exchange….
• Even then, governments still had difficulties
maintaining exchange rates within the stated
boundaries.
• In 1973, the official boundaries for the more widely
traded currencies were eliminated and the floating
exchange rate system came into effect.
Foreign Exchange Transactions
• There is no specific building or location where traders
exchange currencies.
• Trading also occurs around the clock.
• The market for immediate exchange is known as the spot
market.
• The forward market enables a MNC to lock in the exchange
rate at which it will buy or sell a certain quantity of currency
on a specified future date.
Foreign Exchange
Transactions…
• Hundreds of banks facilitate foreign exchange transactions,
though the top 20 handle about 50% of the transactions.
• At any point in time, arbitrage ensures that exchange rates are
similar across banks.
• Trading between banks occurs in the interbank market.
• Within this market, foreign exchange brokerage firms sometimes act as
middlemen.
Foreign Exchange Transactions
• The following attributes of banks are important to foreign
exchange customers:
• competitiveness of quote
• special relationship between the bank and its customer
• speed of execution
• advice about current market conditions
• forecasting advice
Foreign Exchange
Transactions…
• Banks provide foreign exchange services for a fee: the bank’s bid (buy)
quote for a foreign currency will be less than its ask (sell) quote. This is
the bid/ask spread.
• ask rate – bid rate
bid/ask % spread =
ask rate
• Example: Suppose bid price for £ = $1.52, ask price = $1.60.
bid/ask % spread = (1.60–1.52)/1.60 = 5%
Foreign Exchange
Transactions…
• The bid/ask spread is normally larger for those
currencies that are less frequently traded.
• The spread is also larger for “retail” transactions than
for “wholesale” transactions between banks or large
corporations.
• Direct quotations represent the value of a foreign
currency in dollars, while indirect quotations represent
the number of units of a foreign currency per dollar.
• The same currency may also be used by more than
one country.
• A cross exchange rate reflects the amount of one foreign currency per unit
of another foreign currency.
• Value of 1 unit of currency A in units of currency
B = value of currency A in $
value of currency B in $
1 ETB = 0.019 USD

1 Rs = 0.013
A cross exchange rate between ETB and R is 0.019/0.013 = 1.4615384

1 ETB is equal to 1.4615384 Rs
Currency Futures and Options Market
• A currency futures contract specifies a standard volume of a
particular currency to be exchanged on a specific settlement date.
• Unlike forward contracts however, futures contracts are sold on
exchanges.
• Currency options contracts give the right to buy or sell a specific
currency at a specific price within a specific period of time.
• They are sold on exchanges too.
Fixed and Floating Exchange Rates
• Fixed exchange rate system: governments can only allow very small changes
in their currency’s exchange rate.
• In such systems, governments establish a fixed price for their currencies in

terms of some external standard/such as gold or another country’s currency.
The government then maintains this fixed price by buying and selling
currencies in the foreign exchange market.
• In order to conduct these transactions, governments hold a stock of other

countries’ currencies as foreign exchange reserves.
• Foreign exchange market intervention: In a fixed exchange rate system,

the government must prevent its currency from changing value and it does
so by buying and selling currencies in the foreign market.
• Floating exchange-rate system: no limits on how much an exchange rate can

move in the foreign exchange market.
• In such systems governments do not maintain a fixed price for their currencies
against gold or any other standard. Nor do governments engage in foreign
exchange market intervention to influence the value of their currencies.
Instead value of one currency determined entirely by the activities of

private actors- firms/ financial institutions and individuals
If private demand for a particular currency in the market falls/ that
currency depreciates. If private demand for a particular currency in the
market increases that currency appreciates.
In contrast to a fixed exchange rate system, therefore a pure floating

exchange system calls for no government involvement in determining the
value of one currency in terms of another.
Fixed and floating exchange –rate systems represent the two ends of a continuum.
Other exchange rate systems lie between these two extremes.
Some are essentially fixed exchange rate systems that provide a bit of flexibility.
In a fixed but adjustable exchange rate system (the system that lay at the center of
the post-WWII monetary system and the EU’s regional exchange rate system btw
1979-1999) currencies are given a fixed exchange rate against some standard and
governments are required to maintain first exchange rate. However, governments
can change the fixed price occasionally, usually under a set of well-defined
circumstances. Other systems lie closer to the floating exchange rate end of the
continuum, but provide a bit more stability to exchange rates than a pure float.
• In a managed float, which perhaps more accurately characterizes the current

international monetary system, governments do not allow their currencies to float
freely. Instead, they intervene in the foreign exchange market to influence their
currency’s value against other currencies.
• There are usually no rules governing when such intervention will occur, and
governments do not commit themselves to maintaining a specific fixed price
against other currencies or an external standard.
In the contemporary international monetary system, governments maintain a variety of

exchange-rate arrangements. Some governments allow their currencies to float.
Others, such as most governments in the EU, have opted for rigidly fixed exchange
rates.
Still others, particularly in the developing world, maintain fixed-but-adjustable

exchange rates. However, the world’s most important currencies- the dollar, the yen,
and the euro- are allowed to float against each other, and the monetary authorities in
these countries engage only in periodic intervention to influence their values.
Consequently, the contemporary international monetary system is most often

described as a system of floating exchange rates.
So, is one exchange rate system inherently better than another? Not necessarily.
All exchange rate systems embody an important trade-off between exchange-rate
stability on the one hand, and domestic economic autonomy on the other.
Fixed exchange rates provide exchange-rate stability, but they also prevent
governments from using monetary policy to manage domestic economic activity.
Floating exchange rates allow governments to use monetary policy to manage the
domestic economy but do not provide much exchange-rate stability. Fixed
exchange rates are better for governments that value exchange-rate stability and
that are less concerned with domestic autonomy. Floating exchange rates are better
for governments that value domestic autonomy more than exchange-rate stability.
Bond
• A bond is a borrowing arrangement through which the
borrower (or seller of a bond) issues or sells an I Owe You
(IOU) document to the investor (or buyer of the bond).
• Debt Securities with Fixed Income.
Why Issue Debt
• Firm wants to raise capital
• Does not want to dilute ownership
• Can earn more money on the use of the funds in the
business than the cost of interest on the debt.
TERM
• The length of time until the principal amount of a bond must be repaid.
• Maturity Date: The end of the life of a security. The day on which the
principal or amount must be repaid.
Face/Par value
• What the Bond reads and what the investor receives if they hold the
bond to its maturity.
• Face Value of most treasuries is $1000.
Why invest in a bond?
• To distribute risk across a diversity of investments
holdings.
• Investors want a steady reliable interest payment and
return of their full capital or investment at the end of
the term of the bond
International Bonds
• International bonds are bonds issued by a country or company that is
not domestic for the investor
Types of International Bonds
1. Eurobonds
• Are debt issued and traded in countries other than the
country in which the bond’s currency or value is denominated in.
• These bonds are often issued in a currency that is not the domestic currency of the issuer.
• As the name implies, these bonds generally are issued by companies on the European
continent, or in the European Union, but they can trade in non-European countries, too.
• For example, a French company that issues bonds in Japan denominated in U.S. dollars has
issued a Eurobond, more specifically, a Eurodollar bond.
• Other types of Eurobonds are the Euroyen and Euroswiss bonds.
2. Global Bonds
• are similar to Eurobonds, but they can also be traded and
issued in the country whose currency is used to value the bond.
• Drawing from our Eurobond example above, an example of a global bond will be one in
which the French company issues bonds denominated in the U.S. dollar and offers the bonds
in both Japan and America.
Types…
3. Brady Bonds
• Are sovereign debt securities, issued by developing countries but
denominated in U.S. dollars and backed by U.S.
• Treasury bonds. Part of a global program developed in 1989, Brady bonds are
a means to help countries with emerging or embattled economies better
manage their international debt.

Hedging
• Hedging is an advanced risk management strategy that involves buying or
selling an investment to potentially help reduce the risk of loss of an existing
position.
• It is the act of taking opposite positions in the cash and futures markets.

Reasons for hedging?
• The primary motivation to hedge is to mitigate potential losses for an existing trade in the
event that it moves in the opposite direction than what you want it to.
• Assuming you think your trade will go in the opposite direction than what you want over some
period of time, there can be a variety of reasons why you may want to hedge rather than close
it out, including:
• Overconcentration. You may have significant exposure to a specific investment (e.g., company stock) and
you want to hedge some of the risk.
• Tax implications. You may not want to have a taxable event created by selling a position.
• Unrelated to individual investors, hedging done by companies can help provide greater
certainty of future costs.
• A common example of this type of hedging is airlines buying oil futures several months ahead.
• Airlines hedge costs, in large part, so that they are better able to budget future expenses.
• Without hedging, airline operators would have significant exposure to volatility in oil price
changes.

Investments are used to hedge
• Hedging can involve a variety of strategies, but is most commonly
done with options, futures, and other derivatives.
• Indeed, options are the most common investment that individual
investors use to hedge.
• Note that the trading of options and futures requires the execution of
a separate options/futures trading agreement and is subject to certain
qualification requirements.
• The trade-off for hedging is the cost of entering into another position
and possibly losing out on some of the potential appreciation of the
underlying position due to the hedge.
Should you hedge?
• For many businesses and professional investors, hedging can be an important tool to help meet their objectives—
particularly for those that have the necessary resources (e.g., employees with the skill and experience needed to
understand and execute hedges). But it's important to know that hedging can be a double-edged sword—specifically, if
the investment used to hedge loses value or it negates the benefit of the underlying increasing in value.
• For individual investors, hedging may not be the best course of action—for several reasons:
• Complexity. Hedging typically involves advanced investment vehicles (relative to traditional investments, such as stocks and bonds). You would need to fully
understand the hedging instrument in order to consider utilizing hedging. And even then, it may not be suitable.
• Cost. Hedging involves additional costs. Taking on another position (such as buying options) involves a cost.
• Effectiveness. Hedging may not be effective, even if it is implemented as intended by the hedger. Consider the example of an airline that hedges airline jet fuel
costs, only for future jet fuel to be less expensive after the hedge is implemented. Also consider an investor that purchases a diversified mutual fund or ETF: If
you believe that components of the fund may be exposed to the risk of loss, you may not be able to easily hedge only those components of the fund.
• Suitability. Hedging may not make sense for long-term investors. For example, suppose you purchase a stock with the intention of owning it over the long term
(i.e., more than a year). After a couple months, you believe the stock may be exposed to the risk of loss over the short term. Hedging that risk exposure may not
make sense, due to the costs involved with hedging, if your intention is to hold the stock over the long term.
• Consequently, you may want to manage your investments so that you have a diversified mix that aligns with your
investing objectives and risk constraints. Diversification can help protect you against the idiosyncratic risks of individual
stocks. While diversification does not guarantee against a loss, it is likely the more effective risk management tool
compared with hedging for most regular investors.

Case #Ethiopian Cases\4. Case 4.pdf
• After you read case #4, answer the following questions and reflect
1. Should multinational firms hedge foreign exchange rate risk? If not what are
the consequences? If so how should they decide which exposures to hedge?
2. What do you think of general motor’s foreign currency hedging policy?
Would you advise any change?
3. Should GM deviate from it policy in hedging its CAD exposure why or why
not?
4. If GM does deviate from its formal policy for its CAD exposure, how should
GM think about whether to use forward or option for the deviation from the
policy?

3. The Balance of Payments
Balance of payments: accounting device that records all international
transactions between a particular country and the rest of the world for a given
period.
It is the method countries use to monitor all international monetary
transactions at a specific period.
For instance, any time an Ethiopian business exports or imports a product, the value of that
transction is recorded in the Ethiopian balance of payments.
Current account: records all current (nonfinancial) transactions between
Ethiopian residents and the rest of the world.
These current transactions are divided into four subcategories:
1. The trade account registers imports and exports of goods, including manifactured items and
agricultural products.
2. The service account registers imports and exports of service-sector activities, such as banking
services, insurance, consulting, transportation, tourism and construction.
3. The income account registers all payments into and out of Ethiopia in connection with,
royalties, licensing fees, interest payments, and profits.
The Balance of Payments….
4. The unilateral transfers account registers all unilateral transfers from the Ethiopia
to other countries and vice versa.
 Among such transfers are the wages that immigrants working in Ethiopia send back to
their home countries, gifts and foreign-aid expenditures by the Ethiopian government.
In all four categories, payments by Ethiopia to other countries are recorded
as debits, and payments from other countries to Ethiopia are recorded as
credits.
Debits are balanced against credits to produce an overall current account
balance.
• In 2020, current account balance for Ethiopia was -4.4 billion US dollars.
• Though Ethiopia current account balance fluctuated substantially in recent
years, it tended to decrease through 2001 - 2020 period ending at -4.4
billion US dollars in 2020..
BoP…
• Theoretically, the BOP should be zero, meaning that assets (credits) and
liabilities (debits) should balance, but in practice, this is rarely the case.
• Thus, the BOP can tell the observer if a country has a deficit or a surplus and
from which part of the economy the discrepancies are stemming

The Balance of Payments
Capital account: registers financial flows between a specific
country (e.g. Ethiopia) and the rest of the world.
Any time an Ethiopian resident purchases a financial asset- a foreign stock, a bond, or
(even a factory) - in another country, this expenditure is registered as a capital
outflow.
Each time a foreigner purchases an Ethiopian financial asset, the
expenditure is registered as a capital inflow.
 Capital outflows are registered as negative items and capital inflows are registered as
positive items in the capital account.
Balance of payments is calculated by adding the current account
and the capital account.
The current and capital account must be mirror images of
each other.
If a country has a current account deficit, it must have a
capital account surplus.
Conversely, if a country has a current account surplus, it must
have a capital account deficit.
Having a current account deficit means that the country’s total
expenditures in a given year-all of the money spent on goods
and services and on investments in factories and houses- are
larger than its total income in that year.
For example before 2007, the US was able to spend more
than it earned in income because the rest of the world was
willing to lend to American residents.
The US capital account surplus thus reflects the willingness of
residents of other countries to finance American expenditures
in excess of American income.
If the rest of the world were unwilling to lend to American
borrowers, the US would not spend more than it earned
income.
Thus, a country can have a current account deficit only if it
has a capital account surplus.
Balance-of-Payments… a n i t i m p o r ts .
o r ti ng m o re th
e c o u n t r y e x p it
l u s in v o l ve s th s a t r a d e d e fi c c as se t s
t a c co u n t s u r p a ls o kn o w n a f d o m esti
• A curren e b i g g e r a n d is m o u n t o n a l s .
n s i m po r t s a r t h a t t h e a b y n a ti o
c it m e a e a n s u i re d
• A defi u n t s u rp l u s m
i g n a s s e t s a c q
u n t .
p i ta l a c co e r o f f o re n c i a l a c co
a n d, a c a t h e n u m b i n t h e fi n a
e o t h e r h rg e r t ha n a s u r p lu s
• On t h n e r s i s l a m p l ic a te s
b y fo re ig a c c o u n t i
acqui r e d e c u r re n t
e fi c it in t h
d
Usually, a
Even though the current and capital accounts must balance each other, there is no assurance that
the millions of international transactions that individuals, businesses and governments conduct
every year will necessarily produce this balance.
When they don’t, the country faces an imbalance of payments.
A country might have a current-account deficit that it cannot fully finance through capital
imports, or it might have a current account surplus that is not fully ofset by capital outflows.
When an imbalance arises, the country must bring its payments back into balance.
The process by which a country does so is called balance of payments adjustment.
Methods adopted to correct disequilibrium in balance of
payments
Because of either a big deficit or surplus threatening economic stability, governments might
decide to tackle BOP imbalances. However, this is not merely a decree but a series of economic
measures that gradually guide the economy in the intended direction
1. Trade Policy Measures-Expanding Exports and Restraining Imports
2. Expenditure-Reducing Policies:
• Tight monetary policy- raising the cost of bank credit and restricting the availability of credit
• Contractionary Fiscal Policy - An increase in direct taxes such as income tax will reduce aggregate
expenditure
3. Expenditure Switching Policies - works through changes in relative prices.
1. Prices of imports are increased by making domestically produced goods relatively cheaper.
2. Expenditure switching policies may lower the prices of exports which will encourage exports of a country
(foreign customers are encouraged to buy)
3. The important form of expenditure switching policy is the reduction in foreign exchange rate of the
national currency, namely, devaluation
4. Exchange Control- Under his method, all the exporters are ordered to surrender their foreign
exchange to the central bank of a country and it is then rationed out among the licensed
importers
Discussion Questions
In 2020, current account balance for Ethiopia was -4.4 billion US dollars
Discuss with your friends and suggest possible solutions

Foreign Direct Investment
• Generally, the term FDI is used to describe a business decision to acquire a substantial
stake in a foreign business or to buy it outright to expand operations to a new region
• Companies or governments considering a foreign direct investment (FDI) generally
consider target firms or projects in open economies that offer a skilled workforce and
above-average growth prospects for the investor.
• Light government regulation also tends to be prized.
• FDI frequently goes beyond mere capital investment.
• It may include the provision of management, technology, and equipment as well.
• Foreign direct investments can be made in a variety of ways, including opening a subsidiary or
associate company in a foreign country, acquiring a controlling interest in an existing foreign
company, or by means of a merger or joint venture with a foreign company
• The threshold for an FDI that establishes a controlling interest, per guidelines established
by the Organisation for Economic Co-operation and Development (OECD), is a minimum
10% ownership stake in a foreign-based company. That definition is flexible
FDI…
• The net amounts of money involved with FDI are substantial, with more than $1.8
trillion of foreign direct investments made in 2021.
• In that year, the United States was the top FDI destination worldwide, followed by
China, Canada, Brazil, and India.
• In terms of FDI outflows, the U.S. was also the leader, followed by Germany, Japan,
China, and the United Kingdom
• FDI inflows as a percentage of gross domestic product (GDP) is a good indicator of a
nation’s appeal as a long-term investment destination.
• The Chinese economy is currently smaller than the U.S. economy in nominal terms, but
FDI as a percentage of GDP was 1.7% for China as of 2020, compared with 1.0% for the
U.S.

Types of Foreign Direct Investment
Foreign direct investments are commonly categorized as horizontal, vertical,
or conglomerate
• With a horizontal FDI, a company establishes the same type of business
operation in a foreign country as it operates in its home country.
• In a vertical FDI, a business acquires a complementary business in another
country. For example, a U.S. manufacturer might acquire an interest in a
foreign company that supplies it with the raw materials it needs.
• In a conglomerate FDI, a company invests in a foreign business that is
unrelated to its core business. Because the investing company has no prior
experience in the foreign company’s area of expertise, this often takes the
form of a joint venture
BENEFITS AND COSTS OF FDI
Benefits to the host country

The main benefits of inward FDI for a host country are:
• The resource transfer effect
• The employment effect
• The balance of payments effect- Current account surplus
• Effects on competition and economic growth
•FDI in the form of greenfield investment increases the level of competition in a market, driving down
prices and improving the welfare of consumers
•Increased competition can lead to increased productivity growth, product and process innovation,
and greater economic growth
Benefit and Cost…..
Cost to the Host country
1. The possible adverse effects of FDI on competition within the host nation
1. Host governments worry that the subsidiaries of foreign MNEs operating in their country may have greater
economic power than indigenous competitors because they may be part of a larger international
organization
2. Adverse effects on the balance of payments
1. with the initial capital inflows that come with FDI must be the subsequent outflow of capital as the foreign
subsidiary repatriates earnings to its parent country
2. when a foreign subsidiary imports a substantial number of its inputs from abroad, there is a debit on the
current account of the host country’s balance of payments
3. The perceived loss of national sovereignty and autonomy
1. Many host governments worry that FDI is accompanied by some loss of economic
independence
2. The concern is that key decisions that can affect the host country’s economy will be
made by a foreign parent that has no real commitment to the host country, and over
which the host country’s government has no real control
International Institutions and the Liberalization of FDI
• Until recently there has been no consistent involvement by

multinational institutions in the governing of FDI
• The formation of the World Trade Organization in 1995 is changing this
• ‘To assist the trade community in its evaluation of how the WTO should
respond to the growing importance of FDI, the WTO Secretariat today (16
October) launched a 60-page report on "Trade and Foreign Direct
Investment" focusing on the economic, institutional and legal interlinkages
between FDI and world trade’. Source: WTO NEWS: 1996 PRESS RELEASES
Discussion Question
In 2018, Ethiopia attracted foreign investments worth Ksh. 726.6
billion compared to Kenya’s foreign investments of Ksh. 207.6 billion
in the same period (Further Africa, 2019).
What do you think explains this difference in FDI inflows into the
two countries?
How International finance affect international
business?
• Trade finance is a critical element for cross-border trade, and in many
cases the movement of goods across borders, particularly in emerging
markets, cannot occur without it.
• The flow of monetary payments associated with international trade is an
important part of international finance, but only part.
• International finance is a comprehensive study of all monetary payments
among countries, including capital investment and transfer payments
termed the balance of payments.
• The cornerstone of international finance is the exchange of currencies
through what is termed the foreign exchange market.
Features of International Finance
• Expanded Opportunity To Business: due to globalization in business there is an
expanded opportunity to the business.
• Businesses can raise more funds with less cost of capital
• Foreign Exchange Risk- it is financial risk that exists when a financial transaction is
denominated in a currency other than the base currency of the company
• Imperfect Market- another feature of international finance that distinguishes it
from domestic finance is that world markets today are highly imperfect. There are
profound differences among nations’ laws, tax systems, business practices and
general cultural environments.
• Political Risk: it ranges from the risk of loss (or gain) from unforeseen government
actions or other events of a political character such as acts of terrorism to outright
expropriation of assets held by foreigners.
• MNCs must assess the political risk not only in countries where it is currently doing business
but also where it expects to establish subsidiaries.
International Financial Institutions
• In many parts of the world, international financial institutions (IFIs) play a
major role in the social and economic development programs of nations with
developing or transitional economies via;
• Advising on development projects,
• Funding them and
• Assisting in their implementation.
• Though these institutions work independently, they share responsibilities like
• reduce global poverty and improve people's living conditions and standards
• to support sustainable economic, social and institutional development
• to promote regional cooperation and integration

IFIs….
• IFIs achieve these objectives through loans, credits and grants to

national governments
• During recent years, IFIs have made considerable progress in
harmonizing the way they procure goods and services.
• In many cases, they are now using similar policies and procedures,
although the interpretation of these approaches may still vary at the
level of the individual institution.

IFIs
o p m e n t B a n k
e v e l
• African D k
e lo p m e n t B a n
• Asian D e v
l o p m e n t B a n k
b b ea n D e v e e lo p m e nt
• Cari n st r u cti o n & Dev
B a n k fo r R e co
• Eu ro p e a n k
e l o p m e n t B a n
m e r ic a n D e v
• Inter-A
•W o r l d B a n k
& In s ti t u ti o n s
• Othe r I F I s

Common Features of IFIs and Procedures
1. Country Strategies
• All IFIs use country strategy documents, as these are fundamental to
establishing an IFI's lending priorities for a particular country.
• Based on the country's own vision for its long-term development and written by
the IFI, the document lays out the IFI's support program for the nation
• A country strategy begins by analyzing the causes of poverty within the
population and identifying key areas where the IFI's assistance can reduce it
most effectively
• The development of the country strategy involves extensive discussions with
many stakeholders, including government authorities, representatives of civil
society, non-government organizations, development agencies and the private
sector.
Common features….
2. The Project Cycle
• All IFI-funded projects are implemented by the borrowing countries, not by the
IFI providing the funds.
• However, all borrowers must follow the IFI's rules and procedures throughout the entire
project cycle.
• The project cycle, which has similar stages for all IFIs, is the framework for the design,
preparation, implementation, completion and evaluation of a project
• the project cycle consists of the following stages:
• Identification – appropriate project to the country
• Preparation – project design and preparation is borrowers’ responsibility (in consultation)
• Appraisal – IFIs staff conduct in depth assessment of feasibilities
• Negotiation – the two parties negotiate on funding agreement and implementation plan
• Implementation and Supervision- implementation is responsibility of borrower with minimum
assistance by IFIs
• Evaluation – done after the project is completed

Common features….
3. The Procurement Process

• Before you pursue a contract related to an IFI-funded project, be sure
you understand the respective responsibilities of the IFI and the
project's executing agency.
• The IFI and the executing agency do share some of the work of project
preparation but the executing agency is responsible for all phases of
project execution and procurement, which must comply with IFI
regulations.
• These regulations and their related procedures are similar for all IFIs.

Common features
4. Project and Procurement Information
• The best sources of project information are contacts, partners and IFI
staff in the donor and borrowing countries.
• Often, however, project-related documents, procurement notices and
contract awards are available as well on IFI websites.
• Reviewing this information in the context of the country strategy
document will help you monitor the progress of active projects and
assess future developments (and therefore opportunities) in the
borrowing country.

Common features….
5. Suppliers of Goods, Works, Equipment and Non-Consulting Services
• Most IFIs require the borrower to draft a procurement plan, which states in general terms what products
and services will be needed, when they will be required, their approximate costs and the procurement
methods to be used.
• The procurement plan is published on the IFI's website and is updated regularly.
• International competitive bidding (ICB) is the preferred method when procurement involves large
monetary values and/or complex needs. The objective of ICB is to provide all eligible firms with timely
notification so that they all have an equal opportunity to bid.
• Borrowers must issue bid invitations or prequalification invitations in at least one local publication and
in UN Development Business Online
• Before bidding, always familiarize yourself with the procurement guidelines of the IFI that is providing
the loan.
• These guidelines define the policies, procedures and procurement methods that have been agreed on by
the borrower and the IFI.
• Be aware, however, that the relationship between the supplier (you) and the borrower is governed by
the bidding documents and your contract withof the
The Power borrower,
PowerPoint not by the IFI's procurement guidelines.
| thepopp.com 95
Common features
6. Consultants and Consulting Services
• IFIs use the term "consultant" for a wide variety of public and private
entities that provide consulting services.
• These include consulting firms, engineering firms, management firms,
procurement agents, auditors, commercial banks, universities,
research institutions, governmental agencies, NGOs and individuals
• To select consultants for an assignment, the borrower publishes a
procurement notice on UN Development Business Online, dgMarket
and/or the IFI's website.
• The notice will ask suitable firms to submit Expressions of Interest
(EOIs)

Common features
7. Corporate and Institutional Procurement
• IFIs also generate business opportunities through corporate or

institutional procurement, when they purchase goods or services for
their own internal needs.
• IFIs also hire a broad variety of individual consultants and consultancy
firms to provide technical expertise that they do not have in-house

Common features…
8. Private Sector Lending
• In recognizing the important role of the private sector to catalyze positive economic
development, the IFIs have in recent years, increased their focus on direct financial lending
to the private sector.
• Some of the IFIs also lend directly to non-sovereign guarantee actors such as municipal or
local governments and other financial institutions.
• IFIs offer this lending through a variety of financial instruments including direct financing and
private equities, as well as other innovative financing mechanisms.
• These opportunities are typically identified and supported through distinct private sector
units found within the respective IFI, whose main objective is to oversee the developmental
impact of the financing.
• The exceptions to this would be the World Bank and the Inter-American Development Bank,
which have distinct organizational entities, the International Finance Corporation (IFC) and
the Inter-American Investment Corporation (IIC), to support their global private sector
lending operations.
Common features…
9. Trust Funds
• IFIs complement their resources through trust funds.
• These funds are financial and administrative arrangements with
external donors, and are intended to finance high-priority development
needs such as research, technical assistance, advisory services, debt
relief and post-conflict transition.
• The funds come from donor countries, foundations, the private sector
and sometimes the IFI's own grant resources

Common features….
10. Business Approaches
• All IFIs assign project officers to each project and these individuals serve as
the managers and supervisors who implement the project on behalf of the IFI.
• As soon as you identify a project, you should review the project documents to
identify the key decision makers and contact them to express your interest in
participating. Visits to the borrowing country are essential for consulting and
engineering firms, and can be very fruitful for exporters of goods and
equipment as well
• Whether you are meeting with IFI staff or with representatives of the
executing agency, be well prepared and have specific topics to discuss; making
general inquiries about business opportunities or asking for readily available
information will be seen as a waste of time

Discussion
• Take a specific national project you want to get fund from IFI. Discuss
the procedures and principles you need to follow to secure the fund.
• First decide the project type, scope, and fair detail

• Discuss

Fact file on WB
Formation: July 1944; 70 years ago
Type: International Financial Organization
Headquarters: Washington D.C., United States
Membership: 188 countries (IBRD)
172 countries (IDA)
Official language: Arabic, Chinese, English, French,
Russian, Spanish
President:
Parent organization: World Bank Group
What is World Bank?
• An international organization dedicated to providing
financing, advice and research to developing nations to aid
their economic advancement.
Why it came into existence?
The World Bank was created at the end of World War II as a result of many
European and Asian countries needing financing to fund reconstruction efforts.
The Bank is successful in providing financing for these devastated (destroyed)
countries.
The International Bank for Reconstruction and Development was the
first “Multilateral Development Bank.”Before World War II had
ended.
 Harry Dexter White and John Maynard Keynes conceptualised an
international institution to stabilize exchange rates and provide a
source of financing for reconstruction and development among
countries ravaged by the war.
PROGRESS
The new bank received most of its funds from the New York investment community
The bank made its first, general reconstruction loans to France ($250 million – largest
ever) , the Netherlands, Denmark, and Luxembourg in 1947.
The bank’s first bond offering abroad, worth £5 million, came in London in 1951
China used International Development Association (IDA) loans for agriculture and
education projects.
It helped resolve the Indus water dispute between India and Pakistan.
Key Dates
• The “World Bank Group” first came into being in the 1960s
• 1946: World Bank founded along with sister institution, the
International Monetary Fund.
• 1956:International Finance Corporation(IFC) created to support private
ventures and industrial loans.
• 1960:International Development Association(IDA) created to give “soft
loans” to very poor countries.
• 1966: International Center for the Settlement of International Disputes
(ICSID)
• 1988: The new Multilateral Investment Guarantee Agency (MIGA)
insures against political risks and to encourage private inestments.
World bank group
OBJECTIVES
1. To provide long-run capital to member countries for economic reconstruction and
development.
2. To induce long-run capital investment for assuring Balance of Payments (BoP)
equilibrium and balanced development of international trade.
3. To provide guarantee for loans granted to small and large units and other projects of
member countries.
4. To ensure the implementation of development projects so as to bring about a smooth
transference from a war-time to peace economy.
5. To promote capital investment in member countries by the following ways;
(a) To provide guarantee on private loans or capital investment.
(b) If private capital is not available even after providing guarantee, then IBRD provides
loans for productive activities on considerate conditions.
World bank's top borrowers:
1. Mexico
2. Brazil
3. Turkey
4. Pakistan
5. China
6. India
7. Argentina
World Bank's Top contributor's:
1. USA 16.39%
2. Japan 7.87%
3. Germany 4.49%
4. UK 4.30%
5. France 4.30%
CRITISISM
• Promoting Washington consensus and allow only big corporations to
flourish
• Ignore the environmental and social impact of projects
• Cause high debt amongst the countries
• Working with private sector will lead to decrease in the role of the
state as primary provider.
• Decisions are made and policies implemented by leading
industrialised countries
International Monetary Fund (IMF)
• Is an agency of the United Nations, and an international financial institution,
headquartered in Washington, D.C., consisting of 190 countries. Its stated
mission is "working to foster global monetary cooperation, secure financial
stability, facilitate international trade, promote high employment and
sustainable economic growth, and reduce poverty around the world.
• The International Monetary Fund (IMF) works to achieve sustainable
growth and prosperity for all of its 190 member countries. It does so by
supporting economic policies that promote financial stability and monetary
cooperation, which are essential to increase productivity, job creation, and
economic well-being.

IMF and WB
• https://
www.imf.org/en/About/Factsheets/Sheets/2022/IMF-World-Bank-Ne
w

Money Laundering &
Mitigation Strategies
What is Money Laundering ?
• Activity connected with the proceeds of crime & projecting it as clean property
• Involves disguising the true origin of illegitimate funds
• Converts illegally obtained income into other forms to appear it as a legitimate
income
• Mode to insert dirty money in the financial system.
• While the amount of money laundered globally in one year is estimated to equal
between $800 million and $2 trillion, more than 90% of this amount goes
undetected, jeopardizing the global economy and its security
• In 2000, the IMF responded to calls from the international community to expand its
work on anti-money laundering (AML).
Money Laundry…
• In 2009, the IMF launched a donor-supported trust fund to finance AML
capacity development in its member countries
• In 2018, the IMF’s Executive Board reviewed as part of its five year review
cycle of the policy- the Fund’s AML strategy and gave strategic directions for
the work ahead
• Money laundering financing activity in one country can have serious cross-
border and even global adverse effects.
• Jurisdictions with weak or ineffective controls are especially attractive for
money launderers and financiers of terrorism. These criminals exploit the
complexity of the global financial system, the speed at which money can
traverse borders,

Activities generating illegal money
Drug Trafficking Corruption Forgery
Kidnapping
Smuggling
Criminal /
Illegal
Activity
Tax Evasion
Gambling
Coercion
Fraud
Stages of Money Laundering
• Placement : Initial stage in which cash proceeds from criminal

activities is placed in financial institutions.
Stages of Money Laundering….
• Layering : Process of conducting a complex series of financial
transactions, with the purpose of hiding the origin of the money
from the criminal activities
Stages of Money Laundering…
• Integration : Final stage in the re-injection of the laundered proceeds back
into the economy in such a way that they re-enter the financial system as
normal business funds
States of Money Laundering…
1 • Banks
2 • Capital Market firms
Channels used 3 • Insurers
in the money 4 • .
laundry
5 • .
6 • .
123
Money Laundering Typologies
1. Money mules
• A “money mule” is an individual who has been recruited by criminals whether knowingly or
innocently to act as a proxy in the placement of criminal funds into the system.
• Things to look for include small transaction amounts and young people who may be less aware of
the legal implications of their actions.
2. Smurfing
• The typology of “smurfing” involves moving large amounts of illicit money through the financial
system by making smaller transactions.
• “Smurfs” will often spread these smaller transactions across multiple bank accounts to avoid
detection and remain under regulatory reporting limits.
3. Virtual assets
• Although the vast majority of placement and money laundering layering is still undertaken in fiat
currencies (i.e., the Euro, the US dollar, etc.), virtual assets (especially crypto currencies) are
emerging as a growing component in the complex process of layering funds.
• the proceeds of cyber fraud or blackmail could be initially collected on Bitcoin, but then traded
through several crypto currency exchanges for a variety of other crypto currencies, including
privacy coins, before being cashed out 124
Money laundering can be divided into three steps:
• Deposit of illicit funds into the financial system

• Transactions designed to cover the illicit origin of the funds, known as
"layering“
• Use of laundered funds to acquire real estate, financial instruments or
commercial investments

Prevention of Money Laundering by
different intuitions
1. Banks
A. Practice AML Compliance
B. Establish AML Policies - Frontline personnel are instructed to report suspicious behaviors
C. Optimize Know Your Customer (KYC) Verification Processes –
D. Customer Due Diligence – control process to rate client according to risk of money laundering
E. Monitor for Suspicious Activities – submit record of data to law enforcement
F. Update Security Systems
G. Work on Staff Training related to volatile typologies of money laundering
The Problem in the ground (Ethiopia)
1. Main points
1. According to GFI’s estimations, between 2005 and 2014, an
estimated average of US$1,259 million to US$3,153 million dollars
left Ethiopia as IFFs every year.
2. Illicit Financial Flows (IFFs) in Ethiopia have led to an average loss
in GDP growth of 2.2% per year.
3. Data from Global Financial Integrity shows that between 55 and
80% of the illicit financial outflows leaving Ethiopia originate
through trade mis-invoicing, Ethiopia’s response to curb IFFs has
been largely based on a legal approach, which has proven difficult
to implement in practice.
Ethiopia Established a Financial Intelligence Centre (FIC) that would collect, analyze and report
information concerning IFFs. The FIC reports all financial transactions that exceed 300 000 Ethiopian birr as suspicious127
Source: https://addisstandard.com/oped-will-ethiopia-ever-recover-its-stolen-assets-processes-and-challenges/
Discussion
s vi a t h e l e g a l
e , c u rb i n g I F F
e r e a l c h a l l en g h a t p o s s i b l e
p ia is fa c in g t h a s t ti l l n o w . W
• Th o u g h Et h io p r o b le m a t l e sti n ati o n s
d n o t s o l v e t he e n t s i n t h e d e
approac h co u l th i n k , g o v e r n m
h a v e ? D o y o u e c t
suggestio n y o u i r c o u n t r y? R e fl
t h e I F F s t o t h e
w a r e o f
are una

Anti Money Laundry Acts
• Anti money laundering (AML) refers to the web of laws, regulations,
and procedures aimed at uncovering efforts to disguise illicit funds as
legitimate income.
• Money laundering seeks to conceal crimes ranging from small-time
tax evasion and drug trafficking to public corruption and the financing
of groups designated as terrorist organizations
• AML legislation was a response to the growth of the financial industry,
the lifting of international capital controls and the growing ease of
conducting complex chains of financial transactions.

AML Acts in Different countries
• AML regulations in the U.S. have expanded from the 1970 Bank
Secrecy Act's requirement that banks report cash deposits of more
than $10,000 to a complex regulatory framework requiring financial
institutions to conduct due diligence on customers and to seek out
and report suspicious transactions
• The European Union and many other jurisdictions have adopted
similar measures
131
Effectiveness of AML Acts
• It is all too common for jurisdictions to have laws and institutions in place
that are largely compliant with Financial Action Task Force (FATF)
Recommendations yet ineffective in practice
• Based on the FATF data, the average score for effectiveness across all
assessed jurisdictions is only 30%.
• The UK and Spain are the only jurisdictions assessed so far to achieve
scores of 67% or above for both prevention and effectiveness criteria.
• A regional perspective shows some variation, but the same overall story
• When it comes to money laundering, jurisdictions seem to be more effective at
enforcement than prevention.

Countries success in preventing and enforcing

Case 5: Ethiopian Cases\5. Case 5.pdf
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W h a t s h o u
1. j e c ti ve ?
l e g i sla ti o n ? m p l is h it s o b i n
t ta k e t o a c c o g it s st ra te g y
o n s s h o u l d i im p le m e n tin
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a r g u m e n ts s h
3. What l a re n a ?
th e p o l iti ca

E-Commerce and E-Finance
E-Commerce
• E-commerce (electronic commerce) is the buying and selling of goods and
services, via the internet.
• These business transactions occur either as business-to-business (B2B),
business-to-consumer (B2C), consumer-to-consumer or consumer-to-business.
• The terms e-commerce and e-business are often used interchangeably. The term
e-tail is also sometimes used in reference to the transactional processes that
make up online retail shopping.
• E-commerce is powered by the internet.
• Customers access an online store to browse through and place orders for
products or services via their own devices.

E-FINANCE
Electronic Finance transaction is a financial transaction that depends on the
internet or a similar network to which households or non-financial enterprises
have access to bank.
Global integration and deregulation are dramatically changing the structure

and nature of financial services.
World Bank study in 2000:

E-finance has great potential to improve the quality and scope of financial
services and expand opportunities for covering trading risks and can widen
access to financial services for a much greater set of retail and commercial
clients by offering more cost effective services
136
Key Drivers of Evolution of E-finance
1-Technology: Computer, Internet and Telecommunication Technologies

enabled businesses to be conducted in a fast, efficient and secure way.
2-Globalization: Worldwide liberalization of trade and investment facilitated

the growth of global business including the Internet based e-business and e-
finance.
3-Regulations: Both deregulations of the finance industry and re-regulations

of e-commerce facilitated the growth though in some areas lacking behind
technology.
137
Key Drivers of Evolution of E-finance (Cont.)
4-Entrepreneurship: Creativity allowed entrepreneurs, start- ups and seasoned

companies to break ‘old economy’ traditions and deliver business solutions
through new, exciting and often radically different structures.
5-Competition: The above factors created a globally competitive environment

and pool of talents to compete for introducing new technologies, concepts, and
models.
138
Difficulties in transition
Could lead to significant losses
Adopting a new way of life
 Whole range of policy issues should be rechecked
Ex: Future of branches, marketing of services
Large organizations are very often reluctant to undertake radical innovation.

They are generally blindsided by technological changes that alter their existing
markets, procedures and systems of work.
139
Internet substitute for traditional transactions
1-Online Banking: It includes automatic payroll deposit, automatic
bill payment and transfer funds from one account to another,
viewing account status and transaction history.
2-Purchasing by credit card: In these transaction credit card
numbers are sent via internet from buyer to the seller
3-Filling of company reports and tax returns: Companies can
file required reports with government agencies via internet.
140
E-FINANCE MODELS
 The E-Finance sector can be divided into five broad categories:
1-Business to business (B2B)
2-Business to Consumer (B2C)
3-Consumer to consumer (C2C)
141
ORGANIZATIONS FACILITATING E-FINANCE
1-Society for Worldwide Interbank Financial Telecommunication (SWIFT)

SWIFT provides financial data communication and processing services to
support the business activities of worldwide financial institutions for
securities, payments, foreign exchange and money markets, as well as trade
finance.
SWIFT is designed for:
Eliminating the need for paper-based processes in the financial markets,
Lowering costs,
Increasing productivity,
Reducing cost in the financial service industry
142
ORGANIZATIONS FACILITATING E-FINANCE…
2- Automated Clearing House (ACH)
The ACH Network is a highly reliable and efficient nationwide batch-oriented
electronic funds transfer system. ACH payments include:
Direct Deposit of payroll, Social Security and other government benefits, and tax
refunds;
Direct Payment of consumer bills: mortgages, loans, utility bills and insurance
premiums;
Business-to-business payments;
E-checks;
E-commerce payments;
Federal, state and local tax payments
143
3-Online Trading Community

Online trading communities exist to provide a structured method for
trading, bartering, or selling goods or services.
• These communities often have forums and chartrooms designed to facilitate
communication between the members.
144
4- E-Money
E-Money allows payments (including P2P payments) without involvement
of a third party during the payment transaction.
• There are two main types of e-money:
A. E-cash: including electronic purses and multi-purpose stored value smart
cards and
B. Cyber Money (Network Money) which are prepaid software products
used for payments or transfers on cyberspace.
145
5- Price Comparison Service
On the internet, a price comparison service allows individuals to see lists
of prices for specific products. Most price comparison services do not sell
products themselves, but source prices from retailers from whom users can
buy. Ex: Streetprices
6- Value Proposition
Give reasons why customers choose that firm and not other firms.
146
7- Online Auction Business Model
• The online auction business model is one in which participants bid for
products and services over the Internet.
• The strategic advantages of this business model include fewer time
constraints, no geographical constraints, pressure of intense social
interaction through large numbers of bidders and sellers, network
economies, and the ability to capture consumers’ surplus.
147
8- M-Finance: Mobile Banking
Mobile banking (also known as M-Banking) is a term used for performing
balance checks, account transactions, or payments via a mobile device such
as a mobile phone.
In USA, customers mostly prefer E-banking.

In Japan, they prefer M-banking.
In Ethiopia….????
148
Case 6: Ethiopian Cases\6. Case 6.pdf
w er t h e fo ll ow i n g
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wr on g ly pe rc eiv e m e
m an a ge rs u su a ll y s coul d fa c e th is ti
• Why ar ketin g m a n a ger
c ti ca l c h al l en ge s m
• What a re p ra

Thank you
You can use: amareab32@gmail.com, amare.abawa@aau.edu.et, or
Mobile #: +251912687385 for any inquiry

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International Finance and Institution

Amare Abawa (PhD)

Training to Councilor I, FDRE MoFA

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1 • To expand production capacities

2 • To achieve higher rate of profits

5 • To enjoy Political stability and avoid political instability

2 • To avoid high cost of transportation

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• The International Financial Market is the place where financial wealth is

• The markets for real or financial assets are prevented from

1 ETB = 0.019 USD

A cross exchange rate between ETB and R is 0.019/0.013 = 1.4615384

• In such systems, governments establish a fixed price for their currencies in

• In order to conduct these transactions, governments hold a stock of other

• Foreign exchange market intervention: In a fixed exchange rate system,

• Floating exchange-rate system: no limits on how much an exchange rate can

Instead value of one currency determined entirely by the activities of

In contrast to a fixed exchange rate system, therefore a pure floating

• In a managed float, which perhaps more accurately characterizes the current

In the contemporary international monetary system, governments maintain a variety of

Still others, particularly in the developing world, maintain fixed-but-adjustable

Consequently, the contemporary international monetary system is most often

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Benefits to the host country

• Until recently there has been no consistent involvement by

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• IFIs achieve these objectives through loans, credits and grants to

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3. The Procurement Process

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• IFIs also generate business opportunities through corporate or

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• First decide the project type, scope, and fair detail

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• Placement : Initial stage in which cash proceeds from criminal

2 • Capital Market firms

Channels used 3 • Insurers

• Deposit of illicit funds into the financial system

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