Teshome Abebe


My readers will note quickly that this piece is not focused on lamentations, it is not about praise, nor is it an epistle. It is rather about the predictability and authority of the National Bank of Ethiopia (NBE).


Given my audience, let me first set the stage. As is true in almost all countries in the world, the national bank is charged with managing the supply of money in the country. It also has other functions, such as, having a supervisory or controlling role of other banks—primarily private banks; setting regulations and reserve requirements; managing exchange rate regimes; and serving as a lender to private banks. The national bank also serves as the banker of the government. These functions separate it from the Ministry of Finance and Development, which has responsibility for managing the budgetary and planning functions of the government. In an ideal world the functions of the two entities will be segregated in such a way as to delineate the money supply functions from the budget forming and planning functions. In other words, one would have the money creation responsibility while the other will be charged with the financial and budget management tasks of the state.


In a September 2013 article, the Addis Fortune publication attempted to layout its arguments for predictability of the bank. The argument is that the abruptness of the bank’s policies has caused damage to private banks’ performance and profitability, and therefore, the bank needs to be more predictable in the future. It was a case well made by Addis Fortune. In this piece, I will argue that it is not just predictability that is needed, but also more authority.


Obscure Way Forward


At the height of the financial sector’s profitable performance in 2010, the National Bank of Ethiopia (NBE) decided to increase the paid-up capital threshold of private banks to 500 million Birr. This directive was then followed by another highly restrictive monetary policy tool, which imposed the allocation of close to a third of loans or disbursements (27%) for the purchase of government bonds.  Later, in February 2013, the bank issued another directive, which forced the private banks to strike a 40-60% ratio between short-term and long-term loans. Along with other macroeconomic decisions, the impact of these policy directives has contributed to a decline in the growth rate of financial sector performance (from 23% to 0.7%); decline of the growth rate of private consumption (from 45% to 11%); decline of the growth rate of disposable income (from 42% to 15%); decline in the growth rate of net savings (from 43% to 24%); and a decline in the growth rate of GDP (from 46% to 15%) {all at current prices}. The attendant decline in the growth rate of per capita GDP is from 42% to 13%; the decline in growth rate of per capita consumption is from 41% to 9%; and the decline in the growth rate of per capita savings is from 39% to 21% (all data in current prices and for 2010-2011, and 2011-2012).


More ominously, sectoral performance has also been negatively affected as seen through the trend in growth rates, and is presented below as evidence. The agricultural sector (the sector most insulated from the vicissitudes of monetary policy) has maintained relative stability during the period though the growth rate for 2011-2012 had forced the government to ramp up output projections and expectations. The charts below present the growth rates for selected sectors for the three years 2010-2013.



                                    Financial Intermediation










                                    Private Household Business










                                                Real estate


Growth Rates are for 2010-2011, 2011-2012, and 2012-2013.



The evidence provided here are significant indicators of the impact on the economy of monetary policy ostensibly conducted by the NBE. In the context of Ethiopia, the public banks cater by and large to industry (as shown by the volume of loans and disbursements made) while the private and smaller banks cater to wholesale and retail trade—i.e., to mostly small private enterprises.  At a time when the call for the development of the private sector is at its highest, the bank’s policies require more analysis on the impact of those policies on this sector of the economy.


From the point of view of decisions to invest, i.e., committing funds to a future and potentially productive activity, that action is an irrevocable decision. Once invested in a project or an activity, funds cannot be reclaimed—they are sunk. In that sense, investment is an irrevocable act. And it is this aspect of the decision that requires a certain amount of calculated certainty that invested funds are likely to bear fruit. The calculations to invest or not commit funds to an activity or a project depend, in part, on the ability of the decision maker to correctly anticipate the actions of policy makers both in terms of monetary as well as fiscal policy initiatives.


All economies function based upon broad macroeconomic goals but are governed by microeconomic rules. The broad macroeconomic goals of ‘unemployment’, ‘price stability’, ‘economic growth’, and ‘sustainable development’ all are governed by what takes place at the microeconomic front. The rules and relationships affecting incentives, the relationship between the supply of and demand for economic goods, the economic laws affecting the deployment of factors of production, and the economic and legal laws affecting relationships between economic actors are all affected by the actions of policy makers. It is this last aspect that requires some predictability so that economic actors can anticipate the temporality of rules and regulations to such a degree that it helps accelerate the achievement of macroeconomic goals.  Based on its performance in the immediate past, the NBE’s performance has been less than stellar.


This brings us to the second aspect of this short article, and that is the issue of authority.  The Addis fortune article suggested that the actions of the NBE are highly politicized, and provides as an example the 40-60-ratio mandate between short-term and long-term loans.


Let me argue here that accountability without authority is meaningless, and leads to unending blame games in systems and organizations. In an ideal world, the central bank—the NBE in this case--would be a highly independent authority separate and distinct from the budget and financial management arm of the state. Both by practice and by law, the NBE has not had the sort of authority that we can expect from a highly developed system of accountability. This is particularly crucial when it comes to the management of the monetary system of a country. Economists believe—at least some do—that money is really a promise. From the point of view of the supplier, it is a promise to respect the value of a tendered note and to replace it with same kind. From the point of view of the person tendering a note, it is a promise to produce—to produce a good or service of equal value. Viewed in this way, both the creation of money and its management has to be tied to a process of the creation of goods and services, and not be politically motivated. During the days of triple digit inflation in Ethiopia (only a few years ago), the government was intent on showing how robust economic activity could be had in the country. It also wanted to show that the spine of its economic policy—the improvement in agricultural output—is the correct one for the country. The available evidence shows that the supply of money spiked during that period, but the production of goods did not keep up with demand, and as a result, prices soared. The government took the opportunity to tell the world that new wealth was being created in the country, and among the beneficiaries were farmers who have now become millionaires. The fallacy in that argument is not too difficult to discern though there were a few more new millionaires as wealth was being transferred from one group of stakeholders to another with only marginal improvement overall (as can be seen in the improvement in per capita GDP). That is precisely what a very high rate of inflation does—redistribute income from one group to another. It is another form of tax.


Some will argue that the central bank does not need more authority; that the Ethiopian birr is not an important currency (even tiny Eritrea ditched it) and would not make much difference in either the region or even in the country on how it is managed; and that there is hardly any politics involved in the way the bank is managed, operated, and in turn, manages the supply of money. I believe that more authority vested in the central bank will help bring about more accountability, and more accountability will, in turn, lead to more predictability in policy terms. It is not the purpose of this article to exhaust all possible arguments both for and against more predictability and authority. I am certain that there will be all sorts of disagreements as well as support even for this short piece. The primary intent here is to add to what Addis Fortune has introduced, and to invite others to help complete both the analysis as well as the direction of the suggested rebalancing.


Happy New Year!


Dr. Teshome Abebe is Professor of Economics, and may be reached at: 01/01/2014.



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