BY ABEBE WOLDEGIORGIS
After the downfall of the Dergue regime some three decades ago, the Ethiopian People’s Revolutionary Democratic Front (EPRDF) assumed power and took various measures to change the economy from command to market.
Introducing new laws helps attract both domestic and foreign private investment. Privatizing public enterprises and widening the space for the private sector are playing pivotal roles in the economy; providing tax holidays to investors, the establishment of industrial parks, and others can be taken as instances. The measures proved successful in attaining economic progress recognized by international financial institutions. However, in the last three years, due to the outbreak of COVID-19 and the war in northern Ethiopia, the economy has stagnated.
In addition, the increasing rate of inflation because of both domestic and external factors, the shortage of hard currency, and other macroeconomic difficulties posed challenges. To reverse the situation, the government is trying its level best. Abdulmenan Mohammed (PhD) is a financial analyst based in London, and he recently gave an interview to local media and reflected on his view on the nation’s economy. According to him, to redress a decade’s worth of economic problems, liberalizing the economy is essential. The recent invitation of foreign financial institutions to operate here should be seen as a positive sign; however, he said that local banks are extremely worried that foreign banks will come in mass and will expel and engulf domestic markets.
But the situation and the days to come will depend on what type of service products the foreign banks bring to Ethiopia. If foreign banks offer the same service lines as local banks, local banks will face difficulties. The worry is also there with the NBE to some degree. That is why a lot of restrictions are observed in the banking open-up policy document and the draft proclamation of the Banking Business. So the NBE is not going to just open up the sector at once; rather, it will be gradual. Only a certain number of foreign banks will be allowed, and there will be a limit on the number of branches they can open and how much their management can be involved.
The opening will take place in controlled scenarios that will not put local banks at risk. But basically, local banks should not be afraid of competition. It is not realistic to think the big international banks have the appetite to come to Ethiopia, as the government expects. They know the Ethiopian market is too small for big financial institutions like Barkley. Most of the banks that will come are African. Apart from that, NBE officials said all the laws and restrictions applied to local banks will also apply to foreign banks. This will also highly discourage foreign banks, which do not want government intervention to this extent. There are a lot of interventions, apart from the 21 % mandatory investment in government bonds.
Asked whether the merging of local banks is a solution to withstand foreign banks in competition, he mentioned that, if their services and market environment are similar, they can succeed by merging. But if a merger is forced upon the local banks by the NBE, the outcome will be bad. A merger should be based on market congruency and the full consent of the banks. The shareholders also must agree. Local banks can also consider specializing in certain business areas. Abdulmenan further said that access to finance is a big challenge in the Ethiopian economy. This is because the economy is largely informal. Lack of access to finance cannot be fully attributed to the banks. A large number of businesses cannot access banking finance because they are engaged in informal economic activities.
Of course, the central bank considered the banks’ interests in this open-ended process. This is also largely because the sector has to remain stable. If the economy is to remain stable, the banking sector must also remain stable. So, the NBE has to protect the banks’ interests to maintain the stability of the sector. Arbitrary action by the banks can damage the country. According to him, the opening up of the financial sector should be holistic. It must be expected that more foreign investors will come to Ethiopia if it is opened up. The central bank recently established a minimum premium. Insurance companies said that, they are losing revenue because of stiff competition. One of the aims of competition is to expel unfit competitors.
However, the government’s budget deficit is still disrupting the financial sector, and its domestic credit is very large. The government is also forcing banks to invest around 21% of their loans in government bonds. During the EPRDF era, the government had an ideological reason to engage in economic activity. For example, it said 27% of the money from banks was invested in development projects via the Development Bank of Ethiopia. The government is doing this just because its revenue and expenditures cannot match. The current government is intervening in the financial sector as well as the economy at large, even though it has no ideological base.
The government never left the economy to the private sector. The former government, for example, used to force banks to invest 27% of their loan s in treasury-bills. The current government also introduced a 20% mandatory investment requirement in government bonds. Banks’ hard currency surrendering is currently constrained. The previous administration’s 27% bill and overall state participation in economic activities had some ideological support. It was under the developmental state model.
As to him, in Ethiopia, most of the factors of production are under government monopoly. The big and key institutions are under state control. Land and finance are also under government control. If an economy is to operate properly, the factors of production must be led by the market. The economic reform is much talked about, and significant progress has been witnessed, though some shortcomings are visible. So far, many projects, like the sugar factories, have not found buyers as they wished. The government initiated some new projects, and it still has a significant hand in the economy.
Regarding the solution to mitigating the shortage of residential houses, which hugely consumes the middle-income and poor segments of society, he said that, the mortgage market in Ethiopia cannot get off the ground in the near future to address the problems because of various reasons. There are many complicated problems. Those new banks that pledged to specialize in mortgages will soon convert to commercial banking and conventional business. First of all, “mortgage” in Ethiopia is concentrated only in Addis Ababa. Most of those who can buy houses in Addis are employed professionals. But the average housing price is much higher than the average income of employed professionals in the city.
It is incomparable. So housing is unaffordable for the majority. Even if it is a mortgage, they cannot afford the monthly payment. A housing unit’s monthly payment can range between 40,000 and 60,000 birr. How many Ethiopians have such a disposable income that it covers all their other expenses? In addition, it needs stable employment because the mortgage is paid for up to 25 years.
The inflation spike in the country is also disturbing the market. Housing properties also have complications related to documentation problems, making it difficult to transfer title deeds. Starting a good mortgage business in Ethiopia is difficult. Several problems have to be addressed before establishing mortgage banking in Ethiopia. The reason housing prices are highly inflated is because the price of land is highly inflated. Basically, land cannot be sold, but it is being sold indirectly at high prices. So this is distorting everything.
According to him, Ethiopia has abundant untapped natural resources and more than 70 million young people who can be economically active. If emerging manufacturing is encouraged and continues to play a pivotal role in creating jobs for the unemployed, the economy will be propelled to be robust. Therefore, by mitigating the above-mentioned problems, the government should widen the space for the private sector to play in the economy so that building a self-sustaining economy will be realized.
THE ETHIOPIAN HERALD TUESDAY 13 JUNE 2023
