PM-Led Committee Moves Boldly to Rescue Economy

The committee made four core amendments that relieved private banks and triggered forex gains

The Macroeconomic Committee, chaired by Prime Minister Abiy Ahmed (PhD), have introduced major reforms that may succour the economy and the financial industry.

The Committee, which met late last week, made four core amendments that relieve private commercial banks and could trigger forex gains, according to Fitsum Arega, chief of staff at the Office of the Prime Minister.

The committee made decisions on four major items that included raising the interest rate of government bonds, which private banks are compelled to purchase from the National Bank of Ethiopia at a level of 27pc of gross loans they disburse. The decision pushed the yield rate from three percent to five percent. The other three items involve removing the current diaspora account limit of 50,000 dollars; fixing the central bank’s purchasing rate for private banks at 30pc of forex earnings to the mid-rate of the buying rate; and allowing some businesses to trade in dollars.

“The decisions addressed what we have been asking for,” said Adissu Habba, president of the Ethiopian Bankers Association. “We have been requesting this for the past 11 months.”

After the devaluation of the Birr by 15pc against a basket of major foreign currencies in October 2017, the central bank pushed the interest rate on savings to seven percent from five percent. The rate amendment came to the scene with the main aim of fighting expected inflation. However, interest yield rates paid on National Bank bills remained at three percent. This resulted in an uproar in the banking industry.

“Following the amendment, we have submitted our proposal to the central bank requesting a change in the bank’s yield rates,” Adissu told Fortune. “We asked the rate to be at least equal with the minimum interest rate on savings.”

Abdulemenan Mohammed, a financial expert with 15 years of experience, agrees.

“Though the measure is commendable,” he said, “the rate should be increased further to make it fair.”

Ever since the government’s April 2011 directive that compelled banks to purchase bonds using 27pc of loans and advances, the banks have acquired 55.7 billion Br in bills as of the end of the 2016/17 fiscal year. The directive was meant to mobilise savings that would otherwise be used to finance private investors – which accounts for around 41pc of the country’s annual GDP – through the state policy bank, Development Bank of Ethiopia.

Last October’s devaluation was also followed by another directive, which coerced banks to directly transfer 30pc of their foreign exchange gains to the central bank.

“In doing so, we were losing revenues that we could have received from service and commission fees if we sold the currencies to buyers,” Addisu said.

The new changes by the committee has moved the rates to mid range.

Previously, savings of diaspora account holders was limited to 50,000 dollars, but has since been lifted by the new committee chaired by Prime Minister Abiy.

“This could have a positive impact on foreign currency earnings of the country by encouraging more transactions,” Adissu said.

However, Abdulemenan begs to differ on this.

“I don’t think the impact of increasing foreign currencies will be considered as the account holders may not be large,” he said.

The other decision made in an attempt to increase foreign currency earnings was expanding the base of businesses that can accept payments in foreign currency.

Previously, there were only a limited number of businesses eligible to accept payments in foreign currency. The recent decision expanded the list of businesses by adding airport telecom services, chartered private airlines, guest houses, specialised clinics and hospitals.

“This will make payments easier for those who use foreign currencies,” said Abdulmenan.

“We expect the central bank to issue directives to put the changes into effect,” Addisu said.


Published on Sep 01,2018 [ Vol 19 ,No 957]



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