A Macro Viewpoint
It has recently been reported in the news (e.g. “Ethiopis,” Amharic, May 23, 2020) that the National Bank of Ethiopia (NBE) has imposed cash withdrawal limits on individual and institutional bank depositors as follows: Per day Per month
Individual bank depositors 200,000 birr 1,000,000 birr
Institutional bank depositors 300,000 birr 2,500,000
Ethiopian domestic commercial banks are usually known for being saddled with excess liquidity (excess reserves) for lack of low-risk credit outlets. So, cash withdrawal limits such as those now imposed are not only uncommon but also practically pretty much unknown in recent memory. True, cash withdrawal limits are prescribed in pass books (account books) in writing for certain types of bank savings such as time and savings accounts, but they are rarely implemented. Indeed, cash withdrawal from banks is taken for granted so much so that the idea of deposit insurance is quite unheard –of among savers. Hence, big government –owned banks such as the Commercial Bank of Ethiopia have been considered “too big to fail” and as such deposit insurance in their case is implicit rather than explicit, which is why there are no deposit insurance corporations in Ethiopia.
Now, things seem to have changed. First, we heard about there being a liquidity crunch (shortage) in the domestic banking system and as a result the NBE had to come to the rescue with some 15 billion birr lender –of- last-resort credit to banks. And now we have been informed of actual cash withdrawal limits.
What is going on? Why would banks resort to unaccustomed cash withdrawal limits? At a macro level, we can say that net savings of enterprises and institutions and of individuals have decreased because of the recessionary impact of Covid-19.
When revenues and profits of businesses go down, their net savings go down as well, or even financial losses may be registered forcing them to draw down on their bank balances.
Individuals may have lost their jobs and therefore their incomes, which will force them to resort to their savings in the form of bank balances. Alternatively, individuals may be forced to pay more for essential goods and services such as food and house rent as a result of inflation for these basic goods, in which case resort to bank savings would be necessary.
More Specifically
The obvious explanation for bank cash withdrawal limits could be that banks are facing a shortage of cash in local currency. Why should this happen? Consider the following more specific reasons:
• Bank cash deposits are decreasing because of declining business revenue and profits;
• Government tax and non-tax revenues which are deposited in banks are decreasing;
• Individual and household income and therefore bank cash deposits are going down;
• Loan repayments (with interest) to banks are declining because of economic recession and long- standing bad-debt status;
• Inflation of prices of basic goods and services is forcing individuals and households to decrease their bank savings (balances);
• Decreases in foreign exchange receipts including inward remittances, tourism earnings, exports, Ethiopian Airlines receipts, etc. have decreased local currency counterpart funds deposited in banks;
• fear of bank insolvency as a result of over- exposure as in the case of CBE may have aggravated the cash withdrawal surge;
• flight into US dollars and other hard currencies may well be another plausible cause of the increase in cash withdrawals.
The Already Badly Managed State Banking System May be Buckling Under Covid -19 I have repeatedly written about the shambolic manner the state banking system has been managed over the last thirty years. Already, the former Construction and Business Bank has gone bust; the Development Bank of Ethiopia is on life support; the CBE, which was once wrongly re-christened as a Policy Bank, has been forcibly over – exposed to largely unrepayable debt by dubious government development agencies (to the tune of some 500 bn birr) is now struggling to stay above water reportedly through cash injections from the NBE; the NBE itself is now regarded as no more than a currency printing press; what is mind-boggling is that those same persons who helped destroy the state banking system have been recycled to reconstruct it from the detritus of their mangling.
This is likely to complicate further the already serious public confidence crisis the government banking sector has been facing. particularly the CBE which is the only state –sector bank still standing with any stature, may be confronted with deposit base and deposit inflow depletion and therefore, with cash reserve attrition, leading to negative consequences for its lending operations.
More specifically, the CBE is likely to be faced with: a) current deposit inflow declines; b) deposit base depletion; c) declines in cash inflows from principal repayments and interest payments; and d) decreases in deposit inflows from hard currency conversions. All these negative factors will in all probability reduce its cash reserves on hand and with the NBE, thereby restricting its lending operations and therefore its profitability and overall financial soundness.
Covid -19 is expected to hit the banking sector particularly hard
Global trade and travel restrictions in the wake of Covid -19 have particularly been harsh on foreign exchange earnings from tourism, inward remittances, Ethiopian Airlines services, exports, foreign investment, etc. Domestic commercial banks can easily convert their foreign exchange receipts into local currency by resorting to the NBE, maintaining their net foreign exchange positions in the process. At any rate, hard currency receipts of banks are a major source of liquidity, but when these tend to dry up, a liquidity crunch is almost certainly likely to crop up. Similarly, foreign- trade and tourismoriented domestic enterprises would face financial difficulties, negatively affecting their domestic bank balances.
Concluding Remarks
The major causes of the cash withdrawal limits imposed by the NBE appear to be largely prompted by the overall Covid -19- related economic recession whose effects are already being felt.
Government revenues, individual and household incomes and earnings and revenues and profits of business enterprises at all scales seem to have declined, generally causing lower levels of bank deposits than bank cash withdrawals, resulting in the depletion of banks’ deposit bases. This has generally led to the erosion of the cash reserves on hand and with the central bank of banks so that some sort mechanism to stem the cash hemorrhage out of the banking system has had to be devised, and hence the recently announced cash withdrawal limits.
The question is whether there are alternative mechanisms to forestall the cash reserves erosion of banks. Excessive cash withdrawals are a legitimate source of concern, but their real causes should properly identified, Apparently the withdrawals are coming from the vast majority of bank depositors. They originate from large depositors. Why would such depositors need to take out so much money in cash? We understand domestic prices of cars, implicit land prices, house prices, etc. have gone up but there is no reason why such purchases cannot be settled through inter-account transfers and by cheques. So, suspected reasons for large cash withdrawals are illegal intentions to convert local currency into hard currency on the officially illegal black market or to engage in contraband cross- border trade or some sorts of money –laundering operations.
Hence, some sort of restriction on cash withdrawals may be required but not necessarily on the basis of across –the – board directives. Bank deposit accounts over a certain threshold or cut-off point may be confidentially targeted without making the control measure public at all.
The problem with publicized cash withdrawal limits is that it may promote the impression that the banking system is in a financial crisis, possibly encouraging panic withdrawals or even a generalized bank run. So, perhaps the more judicious option might have been to resort to the lender –of –last –resort function of the NBE with adequate access to liquidity and at the same time to exercise confidential financial intelligence surveillance on large- deposit account holders.
On the whole, provided there are no second Covid -19 waves and spikes, the prospects for the world economy have improved with the phased openings of the major world economies including those of the USA, EU and China. Ethiopia’s economy which is significantly dependent on exports, imports, inward remittances, tourism and catering, foreign grants, loans, foreign direct investment, etc. is likely to benefit very substantially from the overall opening of the world economy. True, Covid -19 is apparently only beginning to rise in Ethiopia and its effects domestically are likely to continue to be increasingly more serious, but since total lockdowns are expected to do more harm than good, economic activities should continue on the basis of a strict implementation of anti- Covid 19 guidelines, including stringent social distancing, hand-washing, facecovering, diagnostic and antibody testing, quarantine, etc. protocols. At the same time, in the interest of restoring public confidence in the banking system, the across- the – board cash withdrawal limits may have to be lifted. We shall return to the more fundamental issue of overhauling the entire state banking system after, God willing, we defeat Covid -19!
The Ethiopian herald June 21,2020
BY TEKLEBIRHAN GEBREMICHAEL
