Mamo Mihretu was named governor of the National Bank of Ethiopia (NBE) by Prime Minister Abiy Ahmed (PhD) last week. The appointment sparked debate among Ethiopian banking industry observers. Many of them have expressed reservations about his lack of experience and academic background in central banking and finance, as well as his close ties to international financial institutions. Some even claimed that the new appointee’s aggressive financial sector reforms would lead to a financial catastrophe.
Although this concern is exaggerated, it is not baseless. His economic liberalism and proximity to the Prime Minister are troubling, to say the least. These discussions, however, overlook several concerns about central banking and the governor’s role in Ethiopia.
This article aims to assuage excessive anxieties, contextualize his appointment, and shed light on issues concerning the country’s central banking.
Mamo surged to the center of economic policymaking following Abiy Ahmed’s appointment as Prime Minister in April 2018. He is close to the Prime Minister and is one of the few who has spearheaded the recent economic reforms. He is educated in the fields of law, international trade, and public administration.
He also worked as a senior specialist for the World Bank and as a senior policy advisor to the Prime Minister and CEO of Ethiopian Investment Holding (EIH), a sovereign wealth fund established in December 2021. Mamo, like his predecessor, Yinager, has no experience or academic training in central banking. What is even more puzzling is why Mamo was transferred to the NBE after being appointed CEO of the EIH less than a year ago.
I believe his appointment would have no meaningful impact on the practice of central banking, just as Yinager’s did not. This is not to say that the economy did not suffer from various economic ailments under Yinager’s tenure, such as high inflation, rapid birr devaluation, and so on. These monetary policy failures and the central bank’s current predicament go well beyond the governor’s experience and academic background.
The NBE has been under government control since its inception in the early 1940s as the State Bank of Ethiopia (which included both central and commercial banking).
Despite the central bank’s lack of independence, its governors had a technocratic pedigree until recently, and government borrowing from the NBE was restricted until 2008. Both factors had generally enabled the NBE to keep inflation at bay for decades, except during the 1973 oil shock, the 1974 revolution, the 1985 famine, and following the 1992 regime change.
These two pillars, which were the reservoir of monetary conservatism, have been undermined over the last decade and a half. Proclamation No. 591/20008 lifted restrictions on government borrowing from the NBE, delegated authority to the government to nominate the governor, vice governor, and board directors, and made the NBE accountable to the Prime Minister.
The relaxation of borrowing limitations by the government, followed by an increase in central bank advances to the government, ushered in an inflationary epoch unprecedented in our history.
To make matters worse, the governor’s appointment grew more political.
The governance of the Ethiopian banking industry is paradoxical in that, while the CEO and senior executives of banks are required to have significant banking experience (10 years experience in banking for a CEO, with at least five years in managerial positions), there are no rules regarding the banking experience required. Even senior executives must have at least eight years’ experience in banking, with at least four years in managerial positions.
This allowed for the appointment of novice governors who lacked skills in central banking and finance. Since Abiy’s election, this practice has become increasingly evident. The implication of this approach is that it is undermining one of the key foundations of monetary policy conservatism, which has been staunchly supported by successive governors with technocratic leanings.
The NBE has lost its monetary conservatism and been fully submissive to the government during the last decade and a half. Although the NBE has a monetary policy committee (members drawn from various departments) entrusted with monetary policy matters, monetary policy issues are decided on paper by the Macro Committee, which consists of ten members and is chaired by the PM, and of which the governor of the NBE is a member. This means that monetary policy decisions are made by this committee rather than the NBE.
The governor has little authority in monetary policy considerations under the current legislative and institutional structure of the central bank. This means Mamo would have to carry out the policies determined by the government.
Ethiopia has paid a high price for the country’s approach to central banking.
Because of the NBE’s lack of independence and the political appointment of its Board of Directors and Governor, it has failed in its monetary policy tasks or shown regulatory and supervisory forbearance to state banks, creating a systematic risk to the banking industry.
In order for the NBE to fulfill its primary role of ensuring monetary and financial stability, Ethiopian central banking should be in line with global practice.
This includes reestablishing the NBE as an independent central bank, holding it accountable to Parliament and the public, choosing its board of directors and governor on merit and established track records, and progressively phasing out government borrowing from the NBE.
Contributed by Abdulmenan Mohammed (PhD)