With a mere one-page letter signed by the vice governor of the National Bank of Ethiopia (NBE) and circulated to banks operating in the country, a fundamental modus operandi of the banking industry, enshrined in the sector’s proclamation, was by-passed and suspended indefinitely a few months back.
The executive order in question ordered all banks from following standard procedures stipulated in the foreclosure proclamation 97/1998 issued by the parliament, in collecting assets of nonperforming loans held by coffee exporters. The central bank has, rather imprudently, created a situation where an industry-binding regulation proclamation is replaced or suspended, albeit for a short period of time, by a letter signed by an executive.
The move by the central bank has already prompted other exporters suffering similar loses from the fall in global commodity prices to request the government to keep banks at bay as they too are struggling to meet their bank loan obligations.
The need by the central bank to write an executive order by-passing a proclamation decreed by the legislative came as a result of lobbying from the Coffee Exporters Association with a letter signed by two thirds of its members and addressed to the Prime Minister’s office, calling on him to intervene and stop banks from taking over their properties in danger of being confiscated by the banks due to failure to meet payments.
The coffee industry in Ethiopia has suffered from the significant decline in the price of the commodity at the international market. Ethiopia produces seven to 10pc of the coffee consumed globally and the cash crop accounted for 30pc of the country’s total export this fiscal year. Earnings from coffee exports during the same period have seen a slight increase, though it falls far shorter than the rise in the bulk of coffee exported, which saw a 25% increase in contrast to last year’s.
The coffee industry is not the only sector feeling the pinch of the global slide in commodity prices. In fact, Ethiopia’s overall exports fell by 6.5pc this year in comparison to the previous, only generating 2.1 billion dollars and meeting just above 70pc of its export target. The decline in earnings severely affected exporters, not just coffee exporters, and jeopardized their capacity to make due on their bank obligations. The central bank’s intervention, protecting only coffee exporters, is tricky in this regard because, now other commodity exporters will make similar demands and if the central bank fails to make similar prescriptions to other exporters, it risks being accused of preferentialism.
The timing of the central bank’s intervention is also inconsiderate from banks’ point of view. It comes during the last weeks where banks are supposed to compile their annual reports showing their books, which if the circular issued by the governing body of the financial sector, is implemented would push a significant number of banks’ nonperforming loans (NPL) to more than 5pc, which is the ceiling rate. That ceiling rate has already reached 5.02 during the first six months of the current fiscal year. Failure to keep NPL under the designated ceiling could in theory put banks’ licenses to operate under question because, then the central bank can reprimand banks that have NPL rates exceeding 5pc.
Beyond the timing and circumstance of the intervention, it is not fair to banks which are owned by private investors who rightly expect payoffs from their investments. While the central bank’s intervention may temporarily protect coffee exporters’ properties from foreclosures, it will incur losses on the earnings of bank shareholders.
Despite the pressure the order from central bank puts on banks, there has been very little in the way of resisting or stopping it from the banks. The banks seem to be divided in how they deal with the central bank’s incursions on their rights that is negatively interfering in how they run their businesses. The banks should rightly take the central bank or any other government executive branch to court, which so much so oversteps its mandates by intervening in their way of doing business granted by a proclamation.
The real issue at the bigger picture, however, is the increasing instances where government executives are by-passing legislation and directives by issuing letters. The practice, not unique to the banking sector, creates an unprecedented environment where the principle of separation of power is shaken to its core and the entire constitutional edifice that is the state will be eroded from its very foundation. Here is where the legislature needs to stand its ground and proactively defend its jurisdiction from erosion by the executive.
A crucial pillar of democracy, separation of power, ensures the legislative, executive and judicial organs of government do not over step their mandates and interfere in the powers, mandates and duties of the other. It establishes important checks and balance mechanisms so that offices and officials do not abuse their powers. Although the system allows for measures to be taken by the executive that may infringe on the powers and duties of the legislative, such measures should only be called for during extraordinary circumstances and emergencies.
Even during such emergencies, the executive should exhaust every means, as a matter of principle, to receive its directives and proclamations through the proper channels of legislation and take issuing executive orders as a means of last resort.
Increasing instances in various government agencies of the executive where the legislative body is by-passed, only opens Pandora’s Box and send any sense of the principle of separation of power into utter oblivion.
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