Financial institutions are enterprises engaged with monetary transactions such as deposits, loans, investments, and currency exchange in any country, including Ethiopia. They are vital to a functioning economy in matching people seeking funds with those who can lend or invest. They encompass a broad range of business operations within the financial services sector, including banks, insurance companies, brokerage firms, and investment dealers.
Financial institutions do vary by size, scope, and place. They usually match savers’ or investors’ funds with those seeking funds, such as borrowers or businesses seeking to trade shares of ownership for funds. This leads to future payments from the borrower or business to the saver or investor. The tools for matching all of these interest groups include products such as loans, and market, and stock exchange. Financial institutions allow people to access the money they need. The primary role of banks is to take in funds, deposits, from those with money; they pool the deposits, and lend the money to others who need funds.
The IFIs assist developing countries in the design, implementation, monitoring and evaluation of projects to ensure fulfillment of the goals of development programs and projects. Based on the fulfillment of these programs and projects, they decide on the next round of assistance to the countries that requested financial support.
This assistance can be in the form of budget support to those countries that faced deficits due to excess expenditure compared to their revenue. The revenue they collect may not cover budgetary expenditures due to abuse of resources. Also, the expenditures may be over and above revenues collected from taxpayers, leading to budgetary deficits. Revenues may be used to cover non-economic expenses such as purchase of defense machineries and equipments used to fight against enemies and intruders.
Another leading cause of budgetary deficit is infrastructure financing. This sector is known for its leakages of resources of countries. The main components of the infrastructure sector are roads, bridges, railways, canals, etc. all of which need strict financial control if projects are to be completed in time. The IFIs are keen to support this sector as it is the backbone of any development program.
Another area of interest for the IFIs is promotion of macroeconomic stability and financial resilience in member countries, including Ethiopia. They provide policy advice that helps in reinvigorating the economy, enhancing production, productivity, employment and income. The advice is normally targeted at eliminating obstacles to economic growth and development. This incorporated in the periodic economic development programs and projects implemented throughout the country.
The economic development program is based on the reality on the ground, including poverty, unemployment, and abuse of resources. The IFIs also provide technical assistance in the identification of economic problems engulfing countries. Based on the identified issues, the financial institutions extend financial support to help countries to implement sound economic policies.
These institutions assist developing countries in managing debt. Abuse of external debts by agencies should be avoided in the early stage of implementing programs and projects financed by IFIs. Such actions by the lenders contribute to the prevention of unnecessary costs and resource wastages. In so doing, the IFIs assist in keeping inflation at bay. All these efforts are made in collaboration with the government, which contribute to the stabilization of exchange rate. This stability is critical for attracting investors from abroad coming with their own foreign exchange. These investors do contribute to the growth of gross domestic production, employment generation and export of produces. Such economic efforts foster the fast growth of the economy thereby reducing poverty.
Another contribution of the IFIs is to support development initiatives in the developing countries. The IFIs normally focus on advancing sustainable development. They do not engage in petty projects that do not address the needs of poverty-stricken countries. They engage and finance projects that are focused on reducing poverty in developing countries. They fund projects in areas such as education, healthcare, infrastructure, agriculture, and environmental conservation.
By encouraging investment in these areas, IFIs would improve the standard of living of the people. They also enhance productivity, income and employment for all citizens. They create opportunities for economic growth and social development. This is done through attracting investment in the various sectors of the economy, particularly agriculture, industry and services sectors. In Ethiopia, the agriculture sector is the backbone of the economy supplying food, raw materials, and inputs to the rest of the economic sectors. It also serves as a market for the outputs of the manufacturing and services sectors.
The IFIs play a crucial role in crisis prevention and resolution. They do provide early warning signals to the countries facing economic crises. They conduct financial surveillance and studies for offering policy advice to member countries. They also provide emergency financing to save member countries from economic crises. They also conduct debt relief programs and technical assistance for stabilizing economies of member countries. The IFLs restore confidence in those countries on the verge of economic crises. They attempt to mitigate and lessen the impact of economic shocks. They also promote global financial stability in collaboration with other international organizations and central banks. They approach regulatory authorities to strengthen the international financial system for preventing risks. They produce standards and implement them, using best practices for financial regulation. They strengthen strategic supervision and risk management mechanisms. These strategic tools enhance the resilience, elasticity and flexibility of financial markets and institutions.
The IFIs invest in the capacity building and institutional reform that support member countries to strengthen governance and improve public administration. In so doing, they do enhance regulatory frameworks and build institutional capacity. By assisting developing countries build their strong institutions and effective governance structures, IFIs promote sustainable development. They also foster inclusive growth and development that percolates into the communities of developing countries to enable them design programs and implement them using strong institutions.
Generally, IFIs have a multifaceted role in the global economy at large. They work to promote financial stability and economic development. In so doing, they help reduce poverty across different regions and countries. In this respect, Ethiopia will be a beneficiary of institutions that are strong enough to implement its short and long-run economic development programs. Its ultimate goal is to eradicate poverty from the country.
BY GETACHEW MINAS
THE ETHIOPIAN HERALD 25 APRIL 2024
