Mesfin Namarra is a politician and former Member of Parliament (MP) who is an economist by profession. Before joining politics, he has served the National Bank of Ethiopia (NBE) for 17 years. He was elected as an MP representing the opposition Coalition for Unity and Democracy (CUD) following the 2005 controversial national elections. Since then, Mesfin was silent and remained out of public engagements for more than a decade. He says he has avoided any political engagement since the end of his parliamentary career to help setup his managerial and economic consultancy services firm. Birhanu Fikade of The Reporter sat with Mesfin, recently, to discuss the current macroeconomic condition of the country, NBE’s regulatory decisions regarding the local banking sector, the current state of acute hard currency shortage, and other pertinent issues. Excerpts:
The Reporter: Let’s start with the recent devaluation of the Ethiopian Birr. We can now say that the country’s export sector has failed to take advantage of the currency devaluation. Export has not improved as expected after the devaluation. In hindsight, was that a misinformed move?
Mesfin Namarra: While we are still talking about the previous devaluation, I assume we are at a time where additional devaluation measure might be required. The Birr has been overvalued for long, now. There is a huge gap between the formal exchange rate and the parallel market rate. I don’t want to argue over whether the devaluation was necessary or not. Basically, you don’t just jolt to devaluating your currency. In fact, some of these macroeconomic problems are out there today because the central bank of Ethiopia has failed to undertake a timely and vital intervention. NBE is responsible for printing and circulating money into the economy, regulating the financial institutions and to manage the hard currency reserves of the country.
This is part of the nation’s monetary policy framework. However, in the past 20 years, I never heard of NBE promptly explaining to the public about its monetary policy, foreign exchange regime, inflation management and other policies. These are some of its main duties responsibilities but instead it remained only as a money printing press. Passing harsh regulatory decision on the banking sector is not also its entire responsibility. Banks has suffered a lot from extreme and severe control by NBE. I doubt if the central bank has even advised the government to pursue the devaluation as it is supposed to do. I don’t know if the government has ordered the NBE to implement the devaluation. I don’t have the details of the figures but I can sense that the devaluation has caused various harms. It is also difficult to say that this measure has improved export performances.
Economists downplayed the devaluation from the start claiming that it would result in exacerbating inflation. Export dwindled despite the devaluation. How did you evaluate the current situation?
Theoretically devaluation is one of the instruments that would help boost export earnings from goods and services. However, Ethiopia does not have an export sector that could immediately respond to the devaluation measure. Vast majority of our export items are agricultural commodities. Without proper consideration and the necessary privatization in place, the devaluation came in singlehandedly to deliver results; but it was a failure. The export sector is not only stagnating but it is heading to severe decline. I don’t think devaluation at such a state was the appropriate measure.
There are 16 private banks which are weak and very small in size. Are they fit to avail the required financial resources needed by the economic actors? In general, are they playing the financial intermediation role they are expected to play?
We have only 16 private banks in Ethiopia while Kenya has close to 50. Ethiopian banks have never been given the opportunity to grow significantly. They are under serious pressure to merge and create a few strong banks. Despite this fact, the state owned Commercial Bank of Ethiopia (CBE) remains exempt from many of the regulations. It is exempted from the 27 percent NBE-Bill compulsorily to private banks. That haunted the private banking sector. While grappling with such unfair treatments, to add insult to injury, private banks were slammed with another regulation capping their lending capacity at 16.5 percent of last year’s lending portfolio. Currently, branch expansion and other necessary financial services deepening measures have been halted. NBE is hammering down private banks.
Executives of private banks tell me that they are intimidated whenever they attend meetings with the previous governors of the central bank. It is obvious that private banks are not seamless. They have various weaknesses. You can’t deny that. But they are facing severe problems coming from the regulatory body. They are unable to solidify financial services deepening. They are wondering if the ongoing wind of change would bring some sort of a relief.
NBE often makes a point and says it has been implementing tight monetary policies to curb and maintain inflation at single digit. Contrary to that, mega projects are being executed by the government and some require heavy financing the economy could not afford. Hence, what can be said about this contradiction: policy of NBE and the investment policy of the government?
I can’t explicitly tell you what the monetary policies of NBE are. If you ask why not, the governors didn’t tell us about that definitely. I doubt if NBE is following contractionary and tight monetary policy. You force private banks not extend lending beyond certain limits while allowing CBE and Development Bank of Ethiopia (DBE) to lend billions of birr without restrictions. I am not sure if they dare to question them on such matters. I think the central bank has been turned into a money printing enterprise. Had we looked seriously in the central bank’s internal maneuvers, I would say we could find several ill-doings. It’s not clear how the monetary policy is managed. While I was working with NBE, we had strict procedures on the borrowings of the government. If the government had secured say 100 million in the previous year, this year’s lending will be limited by last year’s government revenue.
I don’t think that is possible in today’s NBE operations. The government would do whatever it desires. Central bank governors in other countries are not necessarily members of the ruling party. They maintain independence. The governor of NBE should have the strength to say no to the Prime Minister if the latter crossed a line. He should be able to decline unfounded requests of the executive body based on expertise and research. Otherwise, he should resign. In our case, we don’t see that sort of stamina. In fact, governors remain governors because of their loyalties to officials.
The finance minister, in his recent parliament appearance to defend the budget, he admitted that the government is planning to borrow more than 50 billion birr from domestic sources to finance its deficit. And yet, he argued that it will not be inflationary since the deficit financing plan is way less than three percent of the total budget allotted for the coming year. How do you assess that proposition?
We don’t exactly know how much money the government borrows for budgetary reasons. The amount you mentioned might be a segment made open only for publicity. I don’t know how you would verify it, but we hear rumors of CBE lending out billions to state owned enterprises every year. Are these borrowings part of the budget plan? I doubt that. People familiar with the financial vehicles of this country are kept at bay. They are not informed and made to be unaware of the finance and monetary situations of the economy.
We don’t have a real strong press that could sniff and shed light to the misdoings of the government. Huge borrowings made by the government remain secret and only a portion of such borrowing are made public. In addition to the low level of production, I think high rate growth in the supply of money is the major cause for inflation in Ethiopia. We hear about CBE lending up to 400 billion birr to the government and most of this loan is a non-performing loan category for the bank. CBE needs to make statements and defend such claims.
The debt sustainability concern has become a headache and the country is descending towards the highly indebted countries status. The gap in the balance of payment remains wide as export earnings remains significantly low. What immediate measures do think will mend this situation? What possible changes in the monetary policy could help the country catch its breath?
Macroeconomic variables are highly intertwined to one another. Domestic borrowing, foreign exchange policy, fiscal policy and other instruments should be analyzed well by experts of the central bank. The experts should gauge how much the government can borrow and place a strict a cap on its drawings. We have heard debt servicing has surpassed USD one billion per year. I suppose it could be greater than this figure. The export earnings couldn’t jump higher than USD three billion. We need to pay USD two billion or more for port services, each year. Hence, country’s export earnings could only cover debt servicing expenses and port service charges. It is then and only that the country could imagine cover its import of medicine, fuel, food and the like. These are very stringent conditions. The state of the current situation is very dire and I don’t know how we could make it through.
NBE pays four percent interest on the 27 percent NBE-Bills that private banks are compelled to purchase. Meanwhile, these banks are subjected to a 16 percent interest rate when they borrow from the central bank. In turn, the bank’s lending interest rate goes up to 20 percent on short and medium terms loans. Such condition conditions are making credit highly expensive and in accessible to many investors. How did you handle such problems while you were working at NBE?
When I was with the NBE, private banks were in the making. I don’t know if private banks borrow from the central banks then. Even if they did, I don’t think that it is necessary at this time because they have considerable level liquidity build up. I wouldn’t mind financing the Grand Ethiopian Renaissance Dam by selling NBE-Bills and offering four percent interest rates on their investment. However, I would say other financial instruments should have been sought. I see CBE as a big elephant which could make significant contribution to this cause but remains exempted from the rules. That doesn’t make any sense. I suggest NBE to foster both public and private banks as alike. We need to reconsider what’s going on in the financial sector.
NBE accuses of private banks of various pitfalls. They are criticized for stashing huge amount of liquidity citing how the 27 percent NBE-Bill didn’t dissuade the performance of the private banks. What would you say to that?
This was last year’s argument. It’s true that private banks have been making a lump sum profit. In fact, we don’t see such huge margins of profit in other countries. In my view, the huge profits are made due to the absence of meaningful market competition. The capital ceilings have barred new banks from joining the finance industry. I think the minimum paid up capital requirement which is extended to two billion birr is quite sizable. That’s why we couldn’t see new banks joining the sector in recent times. But, the situation suggests that Ethiopia is in need of more banks. I have never seen a deposit-lending interest spread of seven percent to 20 percent. This margin is one good example of the absence of market led competition.
Real interest rate remains negative for years due to inflation. Currently, the double digit inflation rate pitted against the seven percent deposit interest rate is eroding savers financial assets. How do you see that?
Depositors are basically saving money in the bank for security reasons. It’s obvious that nobody saves money in the bank to make profits out of the interest rates. The inflation rate eats up any benefit we could assume. I think aggregate bank deposits are growing because of a good deal of money is being printed. Basically, central banks print money in order to replace void notes and to commensurate with the growth of output and transaction in the economy. We have never heard of the government being short of local currency except hard currency. We have seen some governments with better economies have been grappling with hardships to pay wages due to the tight monetary policies they have put in place. They have a central bank that functions according to the needs of the economy not to the government. In our case, we don’t see shortages of local currency. We need to ask ourselves why the government has never been in a situation of facing shortages of birr. It’s unclear how much money gets printed and enters the circulation.
Uncovering such issues is not a matter of national security. We want to hear how much money CBE extended as loan and its financial reports has to be made public. The right size of non-performing loans basket should be made known. If what we hear is true, CBE’s lending is extended to a level that could force the closure of the bank. The 400-billion-birr lending poses a danger not only to CBE’s existence but to the rest of the financial industry in general. But, we need to verify that. I can’t speak for NBE but I have my doubts whether NBE closely monitors and regulates CBE. I wish I knew someone to tell me that’s what NBE does. As a depositor in CBE, I think I have the right to know who the bank extends credits to, how much it lends and how much of the credits extended are non-performing.
It’s rare to see banks reporting a non-performing loan level more than five percent, which coincidentally is the maximum limit NBE specified for the industry. Is that believable?
Until recently, NBE has been shrugging of the fact that it really has a foreign currency reserve equivalent to three-month of imports. We have noted that was not the case. Any report can be skewed based on the interest groups the report is prepared for. There are many issues that need to be unearthed now. The press has to do its job.
How do you see the changes in the finance industry between now and then during your time at NBE?
It’s almost 20 years now since I had left NBE. Private Banks were mostly under formation when I left. There are enormous changes over the years. It’s not fair to compare and contrast the regulatory framework of the current NBE with its pervious conditions. We don’t see that agility from a regulatory body.
The amount of accumulated debt is forcing the government to shelve certain projects and prioritize debt servicing. What do you anticipate the country would face in the coming two or three years?
I don’t have much information on the status of the domestic borrowing. Though domestic borrowings are considered with the settings of foreign exchange rates, we don’t publicly hear much about that sort of thing. It has been made public that there is a huge shortage of hard currency. Ethiopian economists have been sounding the alarm and warning as to what was about to come. Nobody listened. The export earnings together with revenues of Ethiopian Airlines, shipping lines and tourism generate not more than USD six billion. We hear a conflicting report on remittances. Reports of the government claims that USD four billion is generated while the likes of World Bank Group downplay that and suggest remittance inflows are somewhere around USD 700 million. In fact, Ethiopia should have entertained more inflows given the size of the diaspora community it has globally. Mending the export sector is essential but it doesn’t help to address the hard currency shortage in the immediate run. Primary commodities are not available. You need to work on tourism, remittances, foreign credits and grants as much as possible. I fear the current situation would exacerbate further if not appropriately checked in time.
The government has decided to privatize strategic enterprises to relieve the foreign currency shortage. What’s your view on that?
Privatization is part of liberalization policy and the move is appropriate. However, serious preparations and studies must be conducted. You can’t just indulge into privatizing those essential enterprises without adequate preparation. You need to have a capital market to help the process of privatization go smoother. There were studies conducted towards the feasibility of a stock market in Ethiopia. I don’t know where those studies are now. Both NBE and the Ethiopian Chamber of Commerce had launched separate studies in the past. Nobody knows where they are now. Somebody needs to tell us what happened. We need to establish a separate and independent institution that regulates the Ethiopian stock market.
Kenyan Stock Market Authority is well formed and regulates the stock market well. The U.S. has Security and Exchange Commission. We need to have our own institution of that class. Out of the blue, you can’t just privatize Ethiopian Airlines which is seen as a cash cow. We need to be told and made aware of the details of the arrangements of privatization. There are ugly experiences in connection to privatization that endangered the public and governments of Russia and South Africa. The enterprises to be privatized are properties of the Ethiopian society. I prefer they are sold solely to Ethiopian nationals. If it’s for hard currency interest, then better to privatize them for the diaspora.
One of the grim criticisms directed towards NBE has got to do with its decision of expelling the diaspora from owning shares in private banks in Ethiopia. What can be said about that?
I don’t think the diaspora should be seen as an enemy of the state. We have so many brains out there. The actions of NBE are erroneous. Awash Bank is a 21 years old institution. You can find many Ethiopians that have changed citizenships during this period of time although they were Ethiopians when they acquire their shares. You can’t just change the laws overnight, for it is nothing different than a day light robbery. We recall a 1,000-birr par value share has gone up in market value to 20,000 birr but after all these years, they were only allowed to claim the initial value of the share. A double crime has been committed against diaspora shareholders.
How will the diaspora react to the recent privatization the government considers to embark on? Do you think the diaspora would play a role in the process given previous experiences?
I think we need to pledge alliance and conduct some form of national reconciliation process. We need to amend the heinous mistakes committed in the past. It is better to have the backings of the diaspora. We are noticing the quickly spreading positive changes out there. Normalization has to come immediately so that Ethiopia will reap the benefits from its diaspora like in the case of the Philippines, Indian and other governments. We should give them back their financial assets, the ones they had in our banks. There was a belief in the diaspora that sending home remittances in formal channels is equivalent to supporting the government which once they considered as less democratic. Hence, many have tended to avoid sending money formally. But, we need to explain how that doesn’t affect the government instead but hurt the Ethiopian society back home.
Financial experts should be vocal about that. Currently, the situation seems normalized and the new administration is making headwinds. It has to capitalize on that and should bring the diaspora on board. In my view, the diaspora community should be allowed to establish commercial banks let alone to be reimbursed for the shares it used to own in the banks. I say we should allow them reclaim their bank shares and persuade them to make the payments in foreign currencies. Both sides have to forgive one another and forge a better future together. The ruling party has to change the status quo and let experts and professionals to render their skilled services regardless of party membership and locality. That will help to restore both political and economic abnormalities of the country very quick.