Study advices Ethiopia not to rush to banking liberalization

As oppose to the push by the international financial institutions, a new study by the renowned professor of Economics at the Addis Ababa University, Alemayehu Geda advices Ethiopian government to not to rush to banking sector liberalization.

Before considering liberalization, professor Alemayehu suggested that the Government of Ethiopia needs to address issues such as inflation, to avoid mistakes of liberalization in the neighboring Kenya, which worsened the country’s high inflation and made real deposit rate negative. “In the case of Kenya, despite the interest rate liberalization since 1989 interest rate spread remained high. The initial positive real interest rate also quickly returned to negative,” stated the latest study by Professor Alemayehu, entitled, ‘Deregulation and Liberalization of the Ethiopian Financial Sector: Possible Risks and Lesson from Experience’.

“This situation is strikingly similar to current Ethiopian situation where inflation is high, the Birr is depreciating quickly and the Government and the IMF are planning on attaining positive interest rate with liberalization of interest rate. Thus, it goes without saying the outcome would also be similar – non-achievement of the intended result of efficiency,” noted Professor Alemayehu.

“Upgrading the regulatory and supervision capacity at NBE is key to avoid Kenya-type financial sector crisis following liberalization,” the study stated. Professor Alemayehu noted that the related policy of liberalization of foreign exchange market and trade on top of the interest rate deregulation made regulators weak and unable to handle the challenge of the liberalization.

He also advised the Government of Ethiopia to avoid privatization of the state owned banks – Commercial Bank of Ethiopia and Development Bank of Ethiopia, which have around 60 percent market share in the industry at the moment.

“The Ethiopian government needs to watch out for development-oriented banks (Commercial Bank of Ethiopia and Development Bank of Ethiopia) so as to keep them from failure and privatization by international financial institutions. There is no single country that grew without development banking (Asia/China, Korea, Taiwan, Germany etc being some of the examples). It is in your national interest to have a healthy public banking sector as it is key for national development (so look the big picture),” Professor Alemayehu advised.

He also suggested to the Government of Ethiopia to establish a Government-Financial Sector Forum or using the Public-Privat Sector Forum and its own research on a list of major policy issues for the forum is the key political vehicle that the Government may use to realize your interest and the country’s and the sectors safe development.

Professor Alemayehu Geda is one of the 16 independent economic advisory council members, who will by advising Ethiopian government as announced by the Government of Ethiopia this week.