Proposed amendments to the banking business and National Bank of Ethiopia (NBE) establishment proclamations drew fire from Parliament this week as lawmakers raised concerns over the government’s borrowing habits and the risks posed by the entry of foreign banks.
On November 13, the parliamentary standing committee for Planning, Budget and Financial Affairs conducted its first round of discussions on the draft proclamations. Central bank Governor Mamo Mihretu was in attendance, while the executives of many of the country’s first and second generation banks were notably absent.
The Governor gave a brief presentation on the main alterations to both bills, describing the working NBE proclamation as one that barely addresses the central bank’s engagements with the government.
Mamo hailed the draft NBE proclamation for setting concrete rules and conditions regarding government direct borrowing through a temporary overdraft facility.
Article 27 of the draft states that while the NBE may provide temporary overdrafts on a cash flow facility for the government for a duration of no longer than a year, these facilities will not exceed 15 percent of average annual general government domestic revenue of the previous three fiscal years.
– Advertisement –
“This is a bold decision,” said the Governor.
Desalegn Wodaje, head of the standing committee, agreed with the assertion, arguing that the working proclamation does little to curb the federal government’s habit of borrowing directly from the central bank to cover its fiscal deficits.
He observes the NBE proclamation from the Imperial era permitted the government to borrow up to 15 percent of its annual income at three percent interest, while under the Derg, the cap was increased to 25 percent at a similar interest rate.
The bill ratified during the EPRDF regime permitted the government to borrow up to 15 percent of average revenue over the preceding three years.
Desalegne blames the current proclamation for the huge debts incurred by the government.
“Every NBE proclamation in history is better than the present one [which has been operational for the last 16 years]. It allowed for the extension of credit to the government, setting no limits on how much and for how long,” he said.
The bill presented to lawmakers this week is backed by the International Monetary Fund (IMF), which touched on policy changes and financing government deficits in a press release following its first review of Ethiopia under the Extended Credit Facility (ECF) arrangement agreed in July.
“Prudent macroeconomic policies, including continued tight monetary policy and the elimination of monetary financing of government deficits are essential to reducing imbalances and shoring up macroeconomic stability,” reads the press release.
However, people like Mesay Ensene, CEO of Addis Capital Goods Finance Business SC, worry that the 15 percent cap might translate to economic hardship.
“I appreciate the limit. But, I suggest that the percentage should be increased by a few points so that major developmental projects won’t suffer as a result of budget shortfalls,” said Mesay.
The Governor responded that laying out a legal system for engagements between the central bank and the federal government (through the Ministry of Finance) plays a pivotal role in efforts to stabilize the economy.
Mamo asserts that expanding the government’s sources of revenue to cover its budget deficit is among the key reform tasks.
“To fill the budget deficit, the first issue that should be the biggest starting point is to strengthen and improve the government’s tax collection system,” said the Governor.
He pointed to Ethiopia’s low tax-to-GDP ratio, which has fallen to seven percent, much lower than the average in Sub-Saharan Africa.
Mamo indicated that a key target of the economic reforms under IMF stewardship is to raise the ratio by four percentage points over the coming four years.
The IMF’s recent review backs Mamo’s statement.
“Sustained tax revenue mobilization reforms are critical for creating sufficient space for social and development spending needs,” reads the Monetary Fund’s report, citing that authorities have embarked on ambitious and comprehensive tax mobilization reforms, which will be guided by the recently approved National Medium-Term Revenue Strategy.
The Governor also argued that the government should consider and utilize other alternative financial means within the economy.
“Banks can lend to the government through treasury bills, pension funds can lend to the government in a different way. The Ethiopian Securities Exchange, which will be launched soon, can increase the government’s income by offering shares of development companies to the general public,” he said.
Mamo emphasized that the extension of other credit facilities is only warranted in cases of national emergencies.
On the other hand, among the provisions that were challenged by those in attendance, are the terms of the draft banking business proclamation. Stipulations concerning foreign banks, particularly, came under scrutiny.
The draft tabled to Parliament proposes to allow the full or partial acquisition of domestic banks by foreign ones.
The bill states that the NBE may permit such acquisitions on an “exceptional basis.”
The conditions include attracting strategic investments that would benefit the economy and as a way to bail out distressed banks and preserve financial stability.
Aside from this clause, the draft caps aggregate shareholding by foreign nationals and foreign-owned Ethiopian organizations in a bank at 49 percent. It also limits the direct shareholding by a strategic investor in an existing or a new domestic bank to 40 percent.
Kedir Bedewi, vice president of Zam Zam Bank, expressed his belief that the draft offers more opportunities and incentives for foreign banks ahead of the country’s own citizens.
“I question whether this proclamation actually favors the so-called [strategic investors] or foreigners that want to get involved in the banking sector more than it does our own citizens,” said Kedir.
He argues that the 40 percent limit set for direct shareholding by a strategic investor is too high.
“An investor who enters in a domestic bank with a whopping 40 percent share could twirl the bank into any direction it desires. The commercial law stipulates that 25 percent of a company’s shareholders must be present to hold a general assembly and 53 percent can approve any decision. So I ask how the NBE sees the 40 percent limit in light of these?” said the banking executive.
Dawit Keno, acting president of Hijra Bank, contends domestic banks should be extended the option to expand into foreign markets, at least in neighboring countries.
“This bill holds several incentivizing mechanisms for foreign banks, extending them opportunities ranging from opening up branch offices or joint ventures to full-fledged banks. For the sake of leveling the playing field, shouldn’t the NBE put forward the same convenience for the local banks to branch out to at least neighboring countries? How does the draft explore these issues?” he asked.
Regulators met these questions by underlining that only the country’s banking industry is being opened up, not the entire financial system.
Frezer Ayalew, director of bank supervision at NBE, conceded the inquiries had merit but said they are difficult to consider under prevailing policy conditions.
“These issues are linked with company acquisition. What we are saying now is that only the banking sector is being opened up to foreign investors. The entirety of the financial sector has not been liberalized,” said the Director.
He argued that the liberalization of the financial sector must consider and include a vast range of elements, including capital accounts.
“For now, domestic banks are not allowed to invest abroad. However, this bill holds terms that keep the door open to allow the central bank to examine exceptional cases and issue permits for local banks to expand to foreign countries,” Frezer said.
The Governor echoed the same.
“The current competition between domestic banks, the market chain of these banks with either foreign banks or economies, is lacking. It must be improved; strengthened,” he said. “Local banks are not providing adequate loans and foreign exchange, not as much as the economy is starving for. They need much more technological, skill and knowledge refinement.”
Mamo states that although the combined assets of the 32 operating commercial banks might be a little more than 3.5 trillion birr, their borrowers number fewer than 300,000.
“Even including the microfinance institutions that have transcended to bank status, the figure of borrowers does not surpass 3.2 million. The financial inclusivity of the country stands at 45 percent. All these need improvement,” said Mamo.
The Governor asserts that to reduce the unemployment rate, widen the reach of credit lines for all important sectors, grow local banks’ market chains with the outside world, and ensure the advancement of the banking sector within a stable macro-economy, the provision pertaining to foreign investment in the country’s banking industry remains essential.
Still, he underlined that Ethiopia is seeking a regulated banking industry, not a fully liberalized financial system.
“Opening up the market and deregulating the financial sector are two different things. We are just allowing new players to enter the banking sector, the central bank has not fully deregulated the financial system,” he said.
.
.
.
#NBE #Governor #Defends #Farreaching #Banking #Proclamations #Allays #Fears #Foreign #Bank #Entry
Source link
