Whereas the world was being rocked with the domino effect of the financial and economic crises,Africa had its own narrative for its relatively better position. This narrative praises Africa's relative isolation from the highly interconnected global financial system.
Of course, factually, the narrative had only a very small margin of error. Yet, that margin widens when the context in which it happened is accounted for.
Africa's isolation, in normal times, implies underdevelopment. It represents poor financial deepening and inclusion. It shows low level of penetration of financial services.
Viewed through the prism of the financial sector, isolation pushes the cost of capital up. It increases transaction costs and makes business all the more burdensome. Such a case is undesirable for an economy that aspires to solidify growth.
But, as 2008 highlighted, the impact of a financial hurricane can extend deep into the real economy. There was limited awareness amongst pundits that isolation has a negative cost to benefit ratio. Hence, the air was filled with the valour of commendations and praises.
No different was the case inEthiopia. Fundamental statists left no opportunity unexploited when praising the decision of the EPRDFites to protect the local financial system from foreign competition. As much as protectionism was high on the agenda, the time was opportune for the Revolutionary Democrats to pinpoint the fall of free market fundamentalism. If anything, the tit-for-tat between advocates of free market and proponents of a strong state was deafening.
Politics had its own role in the turbulence. Whereas the EPRDFites struggled to score a political goal by stressing their wisdom in advocating protectionism, their opponents were busy defending the structural viability of a free market system.
It took close to two years for the two camps to calm down. A strong factor behind the completion of the era of squabbling was the spreading impact of the global financial crisis.
Apparently, it became obvious that the crisis was strong enough to shatter the financial and economic fundamentals of economies as varying asChinaandEthiopia. Immediate outcomes of the spreading crisis inEthiopiawere a decline in exports, foreign currency shortages and a liquidity crunch in the banking sector.
A continent and a nation that were praising their isolation and protective policies started to curse them. It became apparent that no country could thrive isolated in a world interconnected by the strong threads of globalisation.
Policy makers were confused on how to fight an unbeatable beast with local policy measures. Yet, they preferred to act rather than wait for it pass.
Their choices of policy instruments were to devalue the exchange rate of Birr against major currencies; reduce the reserve requirement of banks from 15pc to 10pc and to direct credit to preferred sectors. Small as the policies were, they only brought temporary relief to the economic players, especially private banks.
Of course, the banks were only partly pleased as the measures were double-pronged. Whereas the release of liquidity through reduction in reserve requirements and the devaluation of the exchange rate could bring sizable gains, the credit directing was undesirable.
As the tide of the financial crisis subsided, with the core - theUnited States- getting less turbulent and the peripheries, emerging developing countries includingChinaandIndia, growing rapidly to effectively absorb the shock, the domestic debate shifted. Under the new normal, the government sat at the helm, with another boost to its ego, and the financial sector stood at the receiving end. This was complemented with the desire by the state to optimise its benefits from the sector, no matter what.
As if to solidify the intent of the government, the five-year Growth & Transformation Plan (GTP) was disclosed, with an ambitious blue print for national resource needs. This was followed with subsequent governmental declarations to seize every opportunity to realise the plan.
One such declaration was a directive issued by the National Bank of Ethiopia (NBE) forcing banks to invest 27pc of their aggregate loan disbursement on NBE bills. It is meant to support national development projects, it was stated.
What was amazing within this declaration was the intentional exclusion of the state-owned banks from the scheme. And even worse was the three percent interest rate on investment that banks are provided with.
Executives of private banks were left at a crossroads. On the one hand, they could not oppose the scheme for it is tied with a 'developmental' objective that they would not like to be seen opposing. On the other, they were sure that the scheme would erode their liquid resources, pushing them to the dead end of bankruptcy. Therefore, silence was their immediate response.
Over time, however, it became clear to them that the pain was intolerable. Hence, they began lobbying for a change in policy through their association. Yet, it is only last week that the regulator took a measure to ease their burden.
The latest measure itself is tricky. As much as it releases some liquidity to the banks, through a reduction in reserve requirement from 10pc to five percent, it brings yet another obligatory string: restructuring the loan portfolio in a way that 40pc of the total loan disbursements are short-term.
Surely, the new directive shows nothing than the hegemony of the central bank. It also shows its unwillingness to uproot the problems of the financial sector. Treating the symptoms is enough, seems to be the belief.
Reports show that private banks have lost a total of 15.3 billion Br in liquidity due to the forced investment scheme. In contrast, the gains to be obtained through the reduction in reserve requirement amounts to 3.3 billion Br. Simple arithmetic shows that the medication dose is not enough to cure the epidemic.
By forcing banks to restructure their portfolio, the NBE indirectly exposes 40pc of the aggregate industrial loan disbursement, which stands at 40.7 billion Br in 2011/12, to the forced investment scheme. This would indeed worsen the pain on the banks.
A reduction in reserve requirement of as small as five percent would only release some liquidity to the banks. It can only be used as a lifeline. It will not bring normalcy back to the scene.
More worrisome is the directive that defines loan structures. Defining the loan structure of banks is none other than an act to define the operational strategies of banks. It is a transgression of the operational independence of banks.
The balance would certainly be contrary to the ultimate objectives. Though it intends to revive business in the country, it will end up suppressing the credit market. This will further drain banks and slowdown economic activities.
Apparently, no one would benefit from this cyclic problem. Instead, everyone, from private banks to businesses, would lose.
The ultimate way out, then, is to scrap the forced investment scheme and leave banks free to decide on their operations. Anything less than this can only bring temporary relief. It cannot uproot the problem.