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BusinessLegislation looks to end central bank lending to government

Legislation looks to end central bank lending to government

Draft proclamation proposes raising NBE authorized capital to 20 billion birr

Amendments under an upcoming re-establishment proclamation for the National Bank of Ethiopia (NBE) propose prohibiting the central bank from granting direct or indirect credit to the government, except by way of an overdraft facility. The development comes as Governor Mamo Mihretu and his team of regulators look to gather the tools to carry out the central bank’s renewed mandate to control inflation rates.

The government has been leaning on direct advances from the NBE to cover its widening budget deficit, but the draft legislation tabled to lawmakers this week looks to stop the central bank from providing direct or indirect credit to “federal, regional, or local government, city administration, or public institution unless explicitly allowed by this proclamation.”

The draft would allow the central bank to provide only temporary overdrafts on a cash flow facility for the government, limited to a duration of no longer than one year. It specifies the overdraft facilities cannot exceed 15 percent of average annual government domestic revenues of the preceding three years and prohibits any rollover for the overdraft, which will carry an interest rate determined by the NBE.

The legislation would also prevent the central bank from providing further overdraft facilities before outstanding dues have been paid off. However, it makes some exceptions.

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“In the event of a force majeure, the government may request the National Bank for an advance or loan beyond the limit provided under this article. Any such additional advance or loan shall be without prejudice to the National Bank’s objective of ensuring price stability, comply with the federal government’s limits on public debt, be limited in time as determined by the National Bank and remunerated at a market interest rate,” reads the draft.

It defines force majeure as an unexpected public health, natural disaster, drought, or a general state of emergency as promulgated by relevant law or significant external economic developments that negatively impact government revenue.

“The National Bank shall not guarantee any loan, advance or investment,” reads the draft.

It proposes to raise the central bank’s authorized capital to 20 billion birr from the current 500 million birr. The draft sets 10 billion birr as the minimum paid-up capital threshold.

The proclamation would also empower the NBE to set price stability targets, determine monetary policy instruments, issue its own debt and payment instruments, issue its own short-term debt instruments, regulate and determine the supply and availability of money and credit, formulate and implement foreign exchange rate policy and macroeconomic policies, license and authorize foreign exchange dealers, and enter into bilateral or multilateral international agreements.

The draft also enables the central bank to invest in legal entities that are “necessary for the exercise of its powers and duties” and sets out rules for the utilization of profits gained from such investments. A portion of the dividends are to be transferred to the General Reserve Fund, while profits above a certain threshold will be transferred to the Ministry of Finance. Similarly, any losses would also be debited from the Fund.

The draft also states the central bank reports directly to the Prime Minister.

Abdulmenan Mohammed (PhD), a financial analyst who keeps a close eye on the Ethiopian financial sector, believes the new proclamation is a good start but argues that more changes are needed to raise the central bank’s accountability.

“Placing restrictions on NBE advances is a commendable step, but the government should show its resolve to create a truly independent central bank,” said the London-based analyst. “This can be achieved by making the NBE accountable to Parliament and the public, through the appointment of its board members, governor, and vice-governors based on competitive hiring, merit and track record, and the determination of their remuneration by an independent committee free from political appointment.”

The draft considers Ethiopian nationality, “sound reputation,” honesty and integrity, a minimum 10 years of professional experience, and academic qualifications in banking, economics, finance, law, auditing, accounting or other related fields as criteria for an NBE board seat.

It sets the limit at six-year terms for the governor and vice-governors and grants the option for re-appointment for an additional term. The criteria for the selection of the governor and vice-governor positions are the same as for board members.

The draft also sets out scenarios for the resignation or removal of the governor. These include resignation, failure to meet requirements and criteria, certified physical and mental disability, bankruptcy, or conviction on a criminal offense.

The draft rules that the NBE can not purchase treasury bills or other government securities on the primary market, and allows for scenarios in which it can grant temporary advances to solvent banks in the midst of a liquidity problem.

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