BY LAKACHEW ATINAFU
Along with maintaining law and order government is incumbent upon devising sound and convenient policies prioritizing the economic sector.
Documents from the National Bank of Ethiopia (NBE) revealed that monetary policy of central banks in a simplified analysis amounts to the determination of the “optimal” quantity of money or (in a dynamic sense) the optimal rate of growth More generally, monetary policy refers to a bundle of actions and regulatory stances taken by the central bank including all of the following:
In the very recent period, the NBE is working to build a healthy economy; the National Bank has stated that the work of expanding the ways of earning currency, producing proxy products locally and evaluating the loans given by banks will be implemented.
It is self-evident that monetary policy plays an important role in the performance of an economy. However, the effectiveness of the policy in achieving the intended goal largely might to fall to be institutional factors that constrain or facilitate the implementation process of the policy.
The Deputy Governor of the National Bank, Salomon Desta said that in order to build a healthy economy, it is necessary to increase foreign exchange reserves and to make Ethiopia comfortable for foreign investment and to promote foreign trade.
Solomon said that the National Bank will take the lion’s share in increasing the banks’ foreign currency reserves. He said that there is great economic potential in the service sector to promote more investment and increase foreign exchange reserves.
He stated that it is important to take care of the financial sector and expand its reach. He also said that the National Bank will increase foreign currency reserves and stabilize the market in the coming years. According to his explanation; increasing foreign exchange reserves and stabilizing the market is critical to building a healthy economy.
For this, the National Bank will focus on building a healthy economy in the coming years, he said. The bank recognizes its role in a healthy economy and is actively involved in nurturing the financial sector and expanding its reach. Ethiopia’s access to the financial sector compared to 80 percent access to the financial sector of neighboring countries, Ethiopia’s 45 percent access is not satisfactory, he added.
He further explained that the National Bank of Ethiopia has made strong efforts to increase access to credit and finance for small farmers and is working in coordination with relevant stakeholders for this purpose. He said that the National Bank has been doing many activities to improve the performance of commercial banks in maintaining the savings culture of the society and will continue to do so.
At the African level, the Ethiopian banking industry has not reached the desired level in terms of accessibility and technological penetration. He said the situation requires the participation of all actors in the area. Accordingly, he stressed that by equipping the banking sector with technology and skilled manpower, it is an activity that enhances international competitiveness.
For decades, Ethiopia’s banking and finance sector has been almost entirely closed to foreigners. But that is soon expected to change as the Government of Ethiopia is aiming to introduce a suite of reforms that will open the sector to international competition with the goal of attracting foreign capital to improve the country’s competitiveness and contribute to its economic growth. Opportunities will be significant.
Currently, there are thirty banks operating in the country consisting of 8,250 branches, serving the country’s population of nearly 115 million. The National Bank of Ethiopia’s (NBE) quarterly bulletin published in October 2022 reported that deposits are equivalent to over USD 30 billion, and loans equivalent to over USD 25 billion. A draft policy document circulated by the National Bank of Ethiopia outlines four ways that foreign entities might enter the Ethiopian banking sector.
Opportunities for U.S. firms include both goods and services: consulting, financial technologies including back end or transaction support hardware and software, payment services, and specialized services in areas such as marketing, and merger and acquisitions. Liberalization of the telecom sector has further driven interest in the use of mobile money which will require relevant software and fin tech solutions.
Challenges exist including a foreign exchange shortage in the country, development of stringent policies by the NBE to minimize risks associated with allowing foreign competition, and what is anticipated to be a slow permitting process. Ethiopia’s current credit supply, product offerings, financial infrastructure, and staff capacity are other potential hurdles that new entrants to the market will have to be cognizant of.
The National Bank of Ethiopia is taking a lead on this liberalization process. In October 2022, discussions with local banks and relevant stakeholders were held to collect feedback on the plan and to inform a way forward. CS Ethiopia will continue to monitor and report on these financial sector reforms as they evolve.
The introduction of a wide range of monetary instruments by central banks engenders competition, efficiency and transparency and broadens financial intermediation in the banking system. It also promotes liquidity management of commercial banks and gradually leads to the development of well functioning money and financial markets which could serve as catalysts for economic growth and development.
So far, the use of such instruments has been extremely limited in Ethiopia due to the underdevelopment of the monetary market and the virtual non-existence of a financial market. Thus, it is envisaged to use a mix of diversified monetary policy instruments so as to effectively carry out the monetary management function of the NBE.
Open Market Operation (Sale and purchase of bonds or securities issued by governments) has generally been used by countries as one of the main instruments for the development of monetary markets. Trading in these instruments liquefies the financial system in particular and the national economy in general and increases financial intermediation.
In light of this, the NBE will use open market operations (sale and purchase of government securities) as one of its monetary policy instruments. In the absence of its own securities, certain amount of government treasury bills needs to be allocated to NBE by the government for its monetary policy purpose.
To prepare the ground for enhanced open market operations, the yield on government securities should be at least close to the minimum interest rate. As a next step, secondary market for government securities needs to be established.
An outstanding central bank credit facility is another instrument used to enhance the financial capacity of commercial banks and to promote financial intermediation and efficiency.
The key advantages of such standing credit facility are transparency and predictability of accessing central banks’ resources to cover short-term needs. This credit facility gives banks an assurance that, when confronted with problems of shortfall in the clearing and a lack of alternatives for raising immediate funds in the inter-bank market, they can settle the clearing with the central bank’s funds at a reasonable interest rate which has a clear relationship with short term market interest rates. The NBE will use this facility as one of its monetary policy instrument.
THE ETHIOPIAN HERALD FRIDAY 17 FEBRUARY 2023
