NBE: Un-central-bank-like

It is typical of incumbents to doggedly defend their economic policies and strategies in the face of observable shortfalls. Ethiopia is past that point. Tabling the federal budget to parliament last week, Abraham Tekeste (PhD), minister of Finance & Economic Cooperation, was sober in his presentation.

There was no hiding the fact that the macroeconomic situation was worrying. He mentioned the unsustainable debt stress, the unrelenting forex crunch and the annoying stagnancy of tax revenue and export earnings. These problems have been around for the past few years, but their severity is translating into double-digit inflation now. Consumers are feeling the pinch.

The budget proposal was thus tame, at 346.9 billion Br, lower than that of previous years when adjusted for inflation. At last, the Ministry seems to have found its incentive to be fiscally responsible, at least where budgeting is concerned if not in execution. The ball lies in the National Bank of Ethiopia’s (NBE) court now, in charge of the nation’s monetary policy. While it should have served as the check to the Ministry, it has instead been feeding its spending sprees in the past.

The central bank should have sounded the horn on the Ministry when in the past fiscal year the budget deficit reached 3.3pc of the gross domestic product (GDP). This exceeds the three percent redline the second edition of the Growth & Transformation Plan (GTP II) has targeted not to cross. When there is a mismatch between revenues and spending, and the government cannot turn to loans given the way they have piled up now, with public debt at over half of the GDP, the central bank has been the go-to institution.

Monetary financing is highly inflationary, and it is hard to deny that the economists at the central bank are not well aware of this. In fact, it was why they reduced planned base money growth from 22pc by six percentage points after the devaluation of the Birr by 15pc against a basket of major currencies. It pointed to a tighter monetary policy down the line – a diverging decision than what has been the case for the past three years until 2017 where broad money supply grew by a quarter of its amount.

The recent contractionary monetary stance by the central bank is a step in the right direction, but it does not close the book on the lack of goal and institutional independence from the executive part of the government. It speaks to the reactiveness of the bank and its narrow set of policies in that it has failed to anticipate and meaningfully address the current inflationary pressure and stubborn foreign currency shortage.

Given the failure of the central bank to arrest inflation and successfully manage the exchange rate to a point there is an adequate amount of it in the economy, a change in leadership is overdue. The over half a century old bank has not been safe from the round of leadership changes that have been evident during the administration of Prime Minister Abiy Ahmed (PhD). Yohannes Ayalew (PhD), vice-governor of the National Bank of Ethiopia (NBE), was relieved from his duties just last month.

Apart from changing leadership, the central bank ought to invest in a robust economic intelligence department capable of timely analysing and gathering sets of data on the ground and in the global market. It needs to make proactive decisions with monetary aggregates and a long-term economic effect in mind.

This will not go the necessary distance in light of the influence the executive body exerts on the central bank though. The residual effects of its reorganisation during the Dergueera that removed all perceptions of autonomy and made the NBE an active participant in national planning are evident.

Teklewolde Atnafu, the long-serving governor of the Bank, is, for instance, a member of the Executive Committee of the EPRDF. This poses a significant conflict of interest. While the executive body of government can be directed to fulfil the promises a party makes during elections, the central bank should serve as a check against spending that is merely politically motivated and has only short-term goals in mind.

Indeed, the central bank ought to be able to work with the Ministry and complement its agendas if the regulator can independently verify that it is in the best interest of the economy. Just as government’s power in the exercise of power needs to be checked by democratic institutions, its level of indulgence when it comes to resources must likewise be restrained.

While the executive body can fall prey to an incumbent’s political agenda, the central bank’s duty should be to assure that there is long-term economic growth and stability.

The central bank should have institutional as well as goal independence. Its target should be to reduce inflation, manage the exchange rate to the point that there is no shortage of foreign currencies and keep unemployment low. It should as well be able to check an indulgent incumbent that is too concerned with its political bottom line. This will realise if the leadership at the central bank are objectively bipartisan.

Enhancing the effectiveness of indirect policy instruments of the regulator can add to giving the bank better monetary control as well as realising a more effective financial intermediation. This can be by launching the secondary market sooner than later and developing an interbank market.

The latter two elements will boost the effectiveness of the central bank’s indirect policy instruments – open market operations and reserve requirements – by making the markets respond rapidly. It empowers the regulator by broadening its influence from what is currently its primary policy instrument – base money controls – and allows flexibility in implementation.

There is no reason that the central bank should continue bandaging the wounds the executive body inflicts on itself as a result of weak management of public funds and excessive spending. Monetary financing of fiscal deficit is not in the interest of the economy’s health nor is it an anecdote to a nation that is cash-strapped. In the face of a parliament that fails to make fiscal irresponsibility accountable, the central bank should stand tall given it is the last line of defence.

Published on Jun 16,2018 [ Vol 19 ,No 946]



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