Scholar urges government to ensure macroeconomic stability before liberalizing financial sector

The renowned Ethiopian economist, Prof. Alemayehu Geda, urged the Ethiopian government to curb the domestic macroeconomic instabilities prior to liberalizing the financial sector.

At a panel discussion organized by Forum for Social Studies (FSS) at Azeman Hotel in Addis Abeba on Thursday Prof. Alemayehu Geda,  Macroeconomic and Financial Matters Researcher at Addis Ababa University (AAU), said that correcting disequilibrium in Ethiopia’s Balance of Payment and taming inflation are the major macroeconomic measures to be taken before opening up the domestic financial market to foreign banks. 

He recalled that 15 years along with a co-author published a survey which recommended the government to strengthen a regulatory capacity of the National Bank of Ethiopia (NBE) before implementing the financial liberalization policy.

“But, so far, the recommendation has not been implemented,” he said in a panel discussion held on Thursday.

FSS is an independent, non-profit institution dedicated to the cause of policy research and democratizing the policy space through informed public debate of development issues and concerns.

Alemayehu, who conducted more than 60 thesis works in various topics of economic issues, explained that Ethiopia’s national credit rate to the private sector is stood at 17%. The data shows 34% in neighboring Kenya.

“Ethiopia has a poor financial sector in the continent,” he said.

Ethiopian banks interest rate to a borrower is 17%. A Customer who deposited money in a bank gets an interest rate of 5%. However, the headline inflation rate is 35% that reduces customers saving to almost a negative rate, Alemayehu said.  “The growth of real sectors will be diminished under such a discouraging scenario,” as he remarked.

Eyob Tesfaye (PhD), a macro economist working for the UN and Board Member of the Commercial Bank of Ethiopia believes that an unproductive loans provided by banks is a contributing factor for the current skyrocketed inflation.

During the financial sector liberalization in Africa, nations allowed unfettered access to foreign firms than strengthening their regulatory frameworks. “In 53 African countries, 78% of all banking crisis were linked to periods of financial liberalization,” Alemayehu presented on his survey.

On the other hand, Asian countries followed a gradual approach of liberalizing their markets. “By so doing, they were successful,” he says.

Establishing government nexus financial sector taskforce to decide a time-span of liberalization and prioritizing work plan of what to liberalize are some of the way outs Alemayehu recommends to avoid demerits of financial liberalization.