The National Bank of Ethiopia (NBE) is defending its decision to devalue the birr by 15 percent on October 11.
Teklewold Atnafu, who governs NBE appeared at parliament on Monday November 6 to deliver the 2016/17 performance and the first quarter report to the budget and finance affairs standing committee. He told Capital that NBE’s actions won’t affect the government’s policy and financial inclusion strategy which it endorsed a few weeks before the devaluation.
This strategy is new to Ethiopia. It limits the bank’s outstanding loan growth rate compared with the preceding year.
The outstanding loan growth rate, which excludes the export sector should increase by 16.5 percent compared with last year. Previously there was no limit on the amount of loans banks could offer. Experts say banks’ profit has increased by 30 percent every year.
The financial industry says their profits will be affected. “Profit depends on interest from loans so this plan will limit this revenue,” an industry insider said.
Banks are also expected to expand their branches by at least 25 percent every year to improve deposit mobilization. “It is part of the financial inclusion strategy of the country, but it will be difficult for banks to expand because they won’t have as much income from deposit mobilization that can be turned into more loans,” experts claimed.
Teklewold argued that banks need to improve their loan growth rate by the given percentage and they are not forbidden from facilitating loans for the export sector.
He also added that banks have option to be involved in the weekly Treasury Bill auction that NBE undertakes. “Since we disclosed that the government will not get loans from NBE for its budget deficit the central bank will provide the finance that is collected from the public via different mechanisms including Treasury Bills,” he added.
He also said that banks will sell their deposit mobilization in the new upcoming scheme that NBE will introduce in the current fiscal year.
Teklewold told the standing committee that the Central Bank will never provide loans for the government budget deficit in the current fiscal year.
“We will do something other than providing loans,” he added.
Mostly the budget gap is filled by the NBE loans or printing new money into the economy. In order to control inflation that will increase from the devaluation, the central bank has implemented a strategy to cut loan provisions for the government and minimize the growth rate of bank loans.
The governor added that the banks are also involved in the secondary or capital market.
“They can sell their money that they are unable to provide as a loan for clients,” he added.
He said that the government will also use such kind of sources to fill its demand.
During his meeting with the budget and finance affairs standing committee the governor has given detailed explanations about the advantage of devaluation.
He said that the macro economic policy is the major issue that the government has to improve to change the government strategy.
About seven years ago the country’s GDP was 370 billion birr and now it is 1.8 trillion birr, according to the governor.
“This economy needs, a lot of things. It needs to grow its hard currency earnings,” he said
To fill the demand the GTP II strategy said that exports need to grow 36 percent every year and earn 14 billion in the 2019/20 budget year.
The hard currency earnings from remittances, loans and grants and FDI are meeting expectations, while the hard currency revenue from export is lagging, according to central bank head.
He said that to improve the earnings from export and feed the hard currency equivalent with the growing economy the sector needs some changes.
The government is working to improve the conditions including curbing illegal trade along the border area to solve challenges faced by the export sector.
The macro economic condition is also the other area that needs improvement. The monetary policy is the other area that will support the changes in the export sector. He said that the devaluation is related to it.
He explained that the exchange rate supports the export.
He added that in the past the government had a strategy to devalue the birr at least by 6 percent every year to keep the equilibrium in favor of the economic condition.
“The inflation rate is very low relation to the financial crisis that occurred few years ago and stood at less than 2 percent while our inflation rate is about 8 percent,” he said. “So to be competitive our inflation rate has to be balanced with our partners but our inflation rate is very high,” he added.
“On the other hand the savings rate in the US was low during the crisis period and recently the rate increased when the economy grew and attracted investors so the USD became stronger and the currency of other trading partners weaker,” Teklewold explained “since we use USD as a major exchange currency our currency has become stronger than the other major trading partners which reduces our export competitiveness,” he added.
He said that on the supply side the government will continue to provide market stabilization by supplying basic commodities including sugar while the demand side is also managed by the monetary policy of NBE which includes limiting the money circulation via loans and improving interest rats to 7 percent.