NBE: Less Central Bank than Printing Press

Given the nation’s macroeconomic crisis, there is a great burden on the National Bank of Ethiopia (NBE). It needs to improve operational practices, policies and leadership, writes Mesfin Namarra (mesfin.namarra@yahoo.com), former member of parliament and NBE staff.

Prime Minister Abiy Ahmed (PhD) has named a new governor for the National Bank of Ethiopia (NBE), replacing Teklewold Atnafu with Yinager Dessie (PhD), commissioner of the National Planning Commission. Yohannes Ayalew (PhD), vice governor and chief economist of the central bank has reportedly been replaced by Bekalu Zeleke, president of the Commercial Bank of Ethiopia (CBE) for a decade.

Cognisant of the fact that the position of the Central Bank Governor requires theoretical and practical knowledge, it would have been preferable had the government replicated the procedure it followed to select the president of Addis Abeba University (AAU).

There should have been a written exam and intensive interview by an independent panel of experts including monetary economists and bankers. The nominees and later shortlisted finalists should have also presented a two-year roadmap on how they intend to perform to change the current unfortunate macroeconomic state of affairs.

The top scorer ought to be selected as Governor, while the second two could be allowed to serve as vice governors or as directors of Economic Research & Policy Planning.

We love to gradually expand the experience gaind to all other institutions and end the defective practice of political appointments for ministerial positions and heads of authorities, irrespective of educational background or work experience.

Among the major functions of a central bank is issuing currency, regulating the financial sector, formulating and implementing effective monetary and exchange rate policies and holding and managing the country’s foreign exchange reserves. NBE has engaged energetically in the first two of its duties and not so on the remaining. The currency has been hastily and abundantly issued while control of private banks and insurance companies has been more punitive than constructive.

The ineffectiveness of the central bank arises from its inability to make use of and defend its given statutory power of maintaining price and exchange rate stabilities. It has also failed at ensuring the soundness of the country’s banking and financial system.

Under the incumbent regime these shortcomings have led to 40-fold price inflation, the 93pc depreciation and devaluation of the Birr and the financial debacle of the Construction & Business Bank (CBB) and the Development Bank of Ethiopia (DBE) over the last 27 years.

The factors behind this glaring underperformance include undue subservience to the political leadership. The autonomy of the central bank, in contract to the global experience, has been undermined.

The shortcomings of the NBE could be linked to a number of significant measures taken by the incumbents including the removal of the longstanding government borrowing limit in  its establishment proclamation.

During my time at the NBE, there used to be strict limits on government borrowing as related to the size of government revenue collected during the preceding year, with proportional limits put on direct advance and sale of treasury bills.

Disbanding a newly established monetary policy committee optimistically modelled on England’s central bank did not help. Neither has forfeiting the effective use of the usual monetary policy instruments including the rate of interest and reserve requirement. This has been done on account of nullifying the effects of unlimited government borrowing and “directed credit,” mainly from government-owned banks such as CBE.

Failure to institute a secondary market for treasury bills and capital, money and financial markets has also capped the institution’s ability to use its indirect monetary policies effectively. The once heralded Addis Ababa Stock exchange, on which at least two major studies had been done, once by the NBE and another by the Chamber of Commerce, have not come to fruition. Implementing the announced privatisation of state enterprises now will be difficult without a stock exchange.

This has been compounded by the central bank’s inability to significantly improve the monetary, financial and macroeconomic database to enhance the statistical foundation for monetary, financial and economic analysis and forecasting.

The benefits of gradually opening up the banking and financial sectors of the Ethiopian economy to foreign participation while at the same time reducing the risks involved therein remain unexplored as a result of the policies of the central bank. This has been exasperated by favouritism shown to government-owned banks, particularly, to the relatively huge CBE, which has significantly undermined competition in the banking sector.

It has been as if CBE and the Development Bank of Ethiopia (DBE) are favourite sons to the government while private banks do not even have the traditionally downgraded privileges of a stepchild. Sometimes one wonders if NBE is regretting having licensed private banks in the first place.

Raising the minimum capital requirement for establishing banks from 75 million Br to half a billion Birr and then to the currently recommended two billion Birr has similarly thwarted healthy completion in the banking sector. More alarming is perhaps the proposal to get the private banks to consolidate when their number is only 16.

Kenya meanwhile has over 40 banks for a population less than half of ours. Private banks are being arm twisted to enter into involuntary mergers.

The disconcerting unfolding of both government-owned and private banks as being one of the significant sources of corruption has not been constructive either. This has been mainly through the practice of “directed credit,” which is bank lending through orders from higher-up the ladder rather than on time-honoured principles of creditworthiness and bankability.

It is not all doom and gloom on the banking front. There have been a few noticeable achievements worth mentioning here. One is the relatively fast pace at which the banking industry has embraced the latest banking technology including Swift, Switch, ATM, internet and mobile banking, and core-banking technology. Another achievement, although still lagging even by African standards, is the rather rapid expansion of bank branch networks throughout the country.

But all this pales into insignificance when weighed against the ravages, wreaked by inflation and corruption, on the vast majority of the Ethiopian people, and hence the need for prompt and effective remedies.

There is a need for a change of leadership at the central bank and government-owned banks, with a view to replacing them with technocrats and professionals willing and ready to subject themselves to the rigorous ethical standards of their trade.

Policy and operational performance at the NBE and government-owned banks also need to be improved. This can be through staff retaining, overseas exposure and date base enhancement and improvement.

The central bank and the state-owned banks ought to always remember that their responsibility is not only to an incumbent party. They must serve as independent tools that can protect the public against uncontrollable inflation, a foreign currency crisis and corruption.

Private Bank branch expansion has slowed down due to the recently imposed restrictive credit caps. It is incredible to see a central bank which abruptly imposes credit caps on private banks on the one hand, while it allows government banks to fork billions of Birr for government projects.

I fail to comprehend how private banks’ lending could be inflationary and needful of credit caps, while government banks’ lending is not.

Another faulty action on the government’s side is the unwritten law that government institutions are not allowed to use private bank’s credit as if the two sides are enemies of each other.

What If the private sector refuses to use government banks?

As understanding the question is half answering it, a proper diagnosis of the financial sector reveals maladies. These are a negative real interest rate; corruption in domestic credit and foreign exchange allocation; excessive monetary expansion; excessive control over private banks and insurers; and an acute foreign exchange shortage.

There are a number of reforms that can be undertaken to ease these predicaments, especially the current acute forex crunch.

Agricultural exports are not the fastest responsive means of stabilisation. Tourism forex receipts and incoming foreign remittance could be considerably increased in the short run.

An equally significant means for addressing this problem is in the financial sector itself. It shall be recalled that through a directive issued by the central, Ethiopians in the Diaspora were given by the banks their share par value while those shares were sold through auctions. The profit was turned into the Finance Ministry.

They could have been advised to sell or transfer their respective shares. What entitles the Ministry to be a beneficiary in this deal is not clear.

Today we are experiencing waves of reconciliation and market reforms. It is time to make peace with the Diaspora and preempt the unreasonable campaign against using bank transfers. Remittance earnings have suffered while the mechanism is benefitting capital flight.

Let us reinstate their shares and also allow them to establish banks if they desire. We should make Diaspora remittance and investment a national agenda and reap the benefits the way India, the Philippines, and Egypt did.

By Mesfin Namarra
Mesfin Namarra (mesfin.namarra@yahoo.com), former member of parliament and NBE staff.

Published on Jun 23,2018 [ Vol 19 ,No 947]



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