The National Bank of Ethiopia (NBE) is drafting a directive on Open Market Operations (OMO) and Standing Facilities (SF) to establish a formal and modern interbank money market on the itinerary to capital market.
Since the Home Grown Economic Reform Agenda was introduced about two and half years ago, the government has been putting in place different reforms and introducing new approaches to improve and correct the macroeconomic imbalance whilst commencing new economic paths.
The development of financial market is one of the pillars that have mainly engaged the liberalization of the sector for the Diaspora.
Rippling the NBE bills has also been implemented in November 2019 which was the other move that was followed by the improvement of the money market.
On this money market development, the Treasury bill (T bill) was liberalized in December 2019 in to the competitive auction and free for interested players.
On this reform, the volume of money that was collected under T bill has expanded significantly and even contributed to the government to replace the major share of direct borrowing from the central bank.
In the second phase the development interbank money market is in works.
At the latest CEOs Forum on the theme, ‘Capital Market Proclamation’ that was organized by Precise Consult and held on Friday April 23 at Sheraton Addis, Melese Minale, Senior Macroeconomic Advisor at NBE expressed that the NBE is working in developing the formal interbank money market.
“There is no interbank money market today. Whilst there is informal deposit placement between banks, that is not really efficient. It is not long term and based on bilateral and mutual trust. So it is not as a formal market and is not equally serving the banking industry,” he said.
The Senior Macroeconomic Advisor added that to develop the interbank money market NBE has hired a consultancy firm based in the Netherlands, working on the area of capacity building, legal framework for secure financial transaction, market infrastructure such as Central Security Depository (CSD) and trading platforms and others. “We are working with banks since they are part of capacity building,” he remarked.
Melese told Capital that, including banks in capacity building helps them better understand how to trade among themselves in the modern platform. As a market maker, NBE will introduce market instruments based on monetary policy operations that are OMO and SF.
The directive for the OMO and SF, shall avail instruments to provide and absorb overnight liquidity at banks, and is under development and will be launched in the near future.
Introducing these instruments means NBE is trading with banks and when banks have marketable security instruments they shall trade it as using collateral with each-others.
According to Melese, legal and regulatory framework has also been incorporated with the capital market proclamation to legalize the money market instruments, which is a primary market.
The market infrastructure such as CSD is enables to register securities electronically at a central platform that allows interested trader to use it electronically.
“So far, currently, a bank that demands to borrow from NBE is required to come physically with collaterals like T bills or other physical certificates, which is inefficient. But if it is deposited at CSD any bank need not to come physically, while using the trading platform at the core banking system,” Melese, who is one of the leader for the formation of the capital market for Ethiopia, explained.
He said that NBE is developing the CSD infrastructure on the process of launching the new scheme at the primary market.
Melese reminded that the current interbank money market is inefficient in different forms. He showed that trust is the only bandage for trading rather than under a legal framework, due to that the interest rate on the current interbank trade is very high.
“The money market should be highly secured and this may happen when banks have marketable liquidity on their hand as collateral whilst NBE is involved as a regulator allowing trade with banks itself,” he added drawing a picture of what the new scheme will create when it launches.
Currently, the central bank is providing loans for banks on two traditional forms; standing facility and emergency liquidity assistance.
On the new money market, NBE shall be lending money on a standing facility on penal rate and at the same time it shall have an overnight deposit facility for banks that have excess liquidity at a predetermined interest rate. “So the interbank money market is benchmarking between the middle of central bank’s lending and deposit interest rates that allow NBE to introduce guidance,” he elaborated further regarding the standing facility.
The emergency liquidity assistance may lead for investigation at the banks before providing the money.
Melese explained that modernizing the money market is crucial for knowing the overall market since it is a liquidity source and the benchmark of pricing, “For instance in the US the T securities margin is the standard for other market.”
“Due to that modernizing the primary market will help for the upcoming secondary market that is expected to be introduced and is in due process since the Capital Market Proclamation has received approval by the parliament,” he told Capital.
On his presentation at the CEOs Forum, the Senior Macroeconomic Advisor also told participants that the benchmark for pricing of any assets in developed market economies is financial market instruments in particular T bills, “without that it is not even clear how you price assets. For example I don’t know how banks price collateral assets today; simply because there is not a benchmark and there is not transparent market where we can see the price of an asset. A clear and transparent market for assets is crucial for efficient resource allocation.”
On the capital market forum that mainly involved the private sector actors as participant, he showed the different rationales on how the new market would benefit the economy.
The commencement of capital market would have different inputs for the economy starting from the expansion of the liquidity in the economy.
“Based on different surveys of the World Bank, World Economic Forum and other local studies access to finance is indicated as a serious bottleneck for the Ethiopian economy and doing business that shall be mitigated by such kind of secondary market mainly for long term projects,” he said.
Developing alternative financial market opportunities has also a rational of market foster price discovery and promotes very important efficient allocation resources in the economy.
Mobilizing national saving would create massive liquidity which will benefit the economy. National saving, mainly the financial saving, will narrow the absence of opportunities for long terms saving in the economy.
He reminded that mobilizing the national saving can also smash from dependence on foreign capital that the country now currently uses for different developmental project. “The national saving expansion would help to reduce the use of foreign capital, foreign exchange imbalance and macroeconomic vulnerability,” he stated.
NBE drafts directive to modernize the money market
National Security Council states the 2nd filling of GERD will go according to plan
The National Security Council of Ethiopia on Saturday issued a statement on current issues in the country regarding national and regional security affairs.
The statement indicates that Ethiopia is going through several challenges due to some internal and external forces working to destabilize the nation.
The statement lists the upcoming election, second filling of the Grand Ethiopian Renaissance Dam (GERD) and maintenance of national and regional peace and security are the decisive steps Ethiopia should take towards for a better tomorrow.
The Council in its statement said that the second filling of the dam will be achieved despite the challenges the country is facing from inside and outside.
GERD talks
Ethiopia responds for the request of Sudan that the Grand Ethiopian Renaissance (GERD) talk shall be lead by the continental organization. Abiy Ahmed said assuming the negotiation process as a failure is incorrect.
Ethiopia says the way forward on the GERD negotiations is to request the Chairperson of the African Union, President Felix Tshisekedi to call the meeting of the Bureau of the Assembly of the AU in a letter addressed to the Prime Minister of Sudan Abdalla Hamdok.
Prime Minister Abiy Ahmed, in response to the letter of Prime Minister Abdalla Hamdok dated 13, April 2021, stated that assuming the negotiation process as a failure is not right, “because we have seen some tangible results including the signing of the Declaration of Principles (DoP) and the establishment of the National Independent Scientific Research Group (NISRG) and its work in relation to stage based filling schedule.”
The letter also cites the Kinshasa meeting, the understanding reached on the resumption of the stalled AU led trilateral negotiation, the agreement reached on the continued and enhanced role of the observers, namely EU, South Africa, and United States, and the need for the current AU Chairperson to use resources at his disposal for the effective discharge of his facilitation role.
Acknowledging the legal and technical issues that need to be tackled for a win-win outcome, the letter also appreciates the AU-led process for providing the opportunity to the tripartite to deal with the most pressing issues in spite of the interruption nine times.
“If parties negotiate in good faith results are within our reach,” says the letter, and “Ethiopia still believes that the best way forward is to continue the trilateral negotiation under the AU-led process to reach a win-win outcome.”
Bottom outlets
Minister of Water, Irrigation and Energy, Seleshi Bekele said that both the recently completed bottom outlets of the Grand Ethiopian Renaissance Dam (GERD) have gone operational with total capacity of discharging 1,860 cubic meter per second.
The Minister said the process of the dam is now in state of reassuring safety, quality and functionality of ancillary structures.
The completion of the two bottom outlets ensures continuous water flows to the downstream countries and supports the overflow of the river, he noted.
Bothe the two outlets are now functional.
“Each has a capacity of discharging 930 metric cube of water per second with total capacity of 1,860 m3/s. It means the two together actually come to discharge the entire flow of Abbay River in a matter of a year.” the Minister elaborated.
“Our dam is designed in such a way that it doesn’t cause any type of harm to downstream countries.” he underlined.
The two bottom outlets have a capacity to complete the withdrawal of 50 billion cubic meter which is average annual flow of the Abay River.
Outflow of the water is not managed only through the two outlets, the Minister said, adding that when thirteen turbines start operation each enables inflow of 330 cubic meter of water per second allowing large amount of water to the downstream.
Some banks prohibited from issuing LC
Following the move of National Bank of Ethiopia (NBE) banning some financial firms from issuing letter of credit (LC) the week was catalyzed by a rush for those commercial banks on clearing their problems.
Reliable source in the financial industry told Capital that NBE suspended about seven banks including some of the biggest from issuing fresh LC.
Fikadu Digafe, Vice Governor and Chief Economist of NBE, said that the regulatory body is focusing on supporting local banks than take measures, “When necessary, such kinds of measures that are implemented recently, are taken.”
Meanwhile, the reason was not clearly stated while sources indicated that it has been surly aligned with hindering of the settlement for the required sum with correspondent/ go-between partners abroad.
Experts on the sector said that some Ethiopian banks are alleged by their delay to clear up their undertaking to provide eventual payment for drafts drawn as per the timeframe despite the commodity supplied by sellers.
The foreign currency shortage seriously affects the country’s economy and foreign trade which then in turn forced the central bank to regulate the sector closely.
The current ban imposed on some banks is related with the shortage, according to sources.
Some banks are not hesitating to issue the LC; despite them not really having the resource on hand, which has become a growing challenge for the sector.
One of the bank leaders that Capital talked to about the matter said that the strong measure and close follow up of NBE is crucial for the sector security in general and assuring of trust for corresponding banks abroad, who are working with the issuing banks.
“If such kinds of delay happened frequently, the interest of correspondent banks to be a partner with a local financial firm will be eroded or the commission charge will be high, which then directly affects the country foreign trade in addition to unnecessary fees,” the source added.
The source explained that the problem is mainly seen on some banks. Banks are expected to settle payments within the maturity time that is up to three days.
He said that top leaders of the banks should review and insure overall foreign exchange exposure to ensure that it is maintained at practical levels and is consistent with available resources.
Late this week, Capital was informed that about five of the seven banks have settled their arrears and are back to the normal operation.
“My personal estimation is that banks get in this problem in relation to the issue of their internal management. When they get in to commitment they are supposed to look in to the inflow and out flow of their resource,” Fikadu commented explaining the reason why banks get in difficulty regarding defaulting on the settlement of LC or other payment modalities.
He said that some correspondent banks may not show interest to work with some local banks, which doesn’t have good reputation on settle their commitment, “that is the reason we are controlling banks with directives, not to get on commitment against their capacity.”
“As a country we don’t have a given default rate, but some banks are now being seen getting in trouble. We have advised them to correct the new trend, while if they tried to continue we will be forced to penalize them as per the regulation,” the Chief Economist told Capital.
He said that these banks shall focus and undertake domestic businesses that would allow them to continue on profitability.
About the latest measure that NBE taken on some banks, Fikadu said that the regulatory body preferred consulting them to correct the operation before taking measures. “While at some point we have to act and taking measures on those who are abusing the rule of the system more than once and are unable to retract,” he explained the reason as to why NBE takes measure on some banks.
Fikadu added that the sector is supposed to be followed closely to assure that the relation with correspondent is healthy.
The World Bank Group private wing International Financial Corporation last year estimated that every year, Ethiopian banks end-up with outstanding LC accrued between USD 200 to 300 million payable to foreign banks. However, no defaults were recorded by Ethiopian banks except for the eventual delays.
LACKING LEADERSHIP
As we never tire of repeating; the modern world system is in its final disintegrating phase. Bifurcation is what the original articulators of the ‘world system analysis’ expect to happen. The elites who have been running the modern world system are now in disarray. In the core countries of the west, incoherence, particularly within the power elites, as well as deepening frustration in the world of the sheeple (human mass) have become vividly visible. Structural fissures of the system (including in the areas of economics, politics, etc.) are graduating to disruptive status. For instance; succession is in the offing even in the core countries like Spain, Scotland, etc. The EU is also at the crossroads. The US is witnessing unprecedented disjointedness within its traditionally homogeneous ruling political class, with consequences unknown!
Realignment is taking place in the UK’s political scene. The Labor Party, under the leadership of Jeremy Corbyn is reasserting its traditional policies. Voters seem to like the new leadership. By trying to go back to its roots, the labor party is forcefully redefining the interests of the sheeple, i.e., outside the make believe world of the notorious ‘deep state.’ As a result, the Labor Party is increasingly attracting the silent and disgruntled apathetic majority. By coming up with a clear manifesto, it has clarified current issues as they pertain to the interest of the majority. This is leadership! On the other hand, the Conservative Party, by trying to muddle through, as usual, without convincing narratives, has started to alienate the sheeple. We believe the recent election in the UK is an indicator of things to come in Europe. Greece, Spain and others, even though they have brought new movements to power, the parties were not able to implement their own agenda. The global institutions of economic governance (TROIKA=EU Commission, EU Central Bank, IMF), as usual, managed to frustrate the newcomers’ pro-people policies. Consequently, it is still austerity left, right and center and the countries are in limbo, an indication of failed leadership!
Trumpism is also trying to carve its way through the minefields planted by the most powerful ‘deep state’ of the world system. Hardly a day goes by without some element of the deep state accusing the President of the United States of some alleged wrongdoing. The fact is; the US ‘deep state’ doesn’t want to acknowledge Trump as an elected president, since he seems to be challenging some of the deep state’s activities! Once Bernie Sander’s campaign was successfully frustrated, a good portion of the US electorate decided to cast its protest votes to support trump against those affiliated with the D.C. swamp, to use Trump’s phrasing. The battle between the ‘deep state’ (and its cohorts) and the populist movements, like the ‘Tea Party’, is probably just beginning! One thing is clear; unlike those days, when such a person/movement can (easily) be sidelined by some cleaver means, political or otherwise, the current situation might not allow such indulgences, since the sentiment of the governed is not all that forbearing! Given such dramatic developments in the core countries of the world system, will there be an opening for those of us who perennially suffer the awful governance of the ‘Mafiosi States’?
Even though many of the African countries boast formally constituted political ideologies, as expressed in their state constitutions (democratic, republic, federal, etc.) their governments’/bureaucracies’ operations are much closer to that of organized crime than anything else. Just as the ‘deep state’ is the real and perennial government in the rich countries of the west, the ‘Mafia State’ is the one calling the shots behind the façade of federalism, republic, blah, blah, in many of the African states. The sad fact is; neoliberalism, marshaled by monopoly capital, has created plenty of parasitic oligarchs and rent seekers under the auspices of the African states. The polarization thus created continues to destabilize African societies to the point of irreversible collapse. No wonder the number of completely failed and failing states in Africa keeps on increasing! For example, all the three Federal states of Africa, namely the Republic of South Africa, the Federal Republic of Nigeria and the Federal Democratic Republic of Ethiopia are facing protracted problems, mostly on the account of bad governance (and not always as a result of their federal structures)! Whatever forms of government a country adopts, if the operationalizing tools don’t include effective democracy, lived ethics and impeccable justice, situations won’t be conducive to peaceful coexistence and soon it will be back to the future where primordial instincts (identity politics) will gain the upper hand. However, unlike the recent past, the international political environment seem to favor open dialogue between protagonists in the African political landscape.
Sadly, it is now decadence and grand/political corruption rather than decency and good governance that pass as traits of civilized culture in our vast and fast fragmenting region. The current motto of Africa’s ‘strong men’, (not many women) seem to be just like that of a well-known oligarchs of yesteryear: ‘Claim everything. Explain nothing. Deny everything.’ (Prescott Bush- 1966, oligarch, father and grandfather of US Presidents). By now we should unhappily acknowledge that truth is a crime to those obsessed with power. In addition, we should resign to the fact that our current leaders are probably incapable of transcending tribalism and will soon lead the continent to “make nothing from everything.” PJ O’Rourke. Good day!
