Over the past few decades, financial inclusion has remained among the top global agendas. In 2011, public institutions in 40 countries signed the Maya Declaration of Alliance for Financial Inclusion aimed at broader access to financial services at lower costs. Similarly, the World Bank began publishing comprehensive reports on financial inclusion in 2011. Ethiopia developed “The National Financial Inclusion Strategy” in 2017, containing several targets.

The news of the establishment of a capital market has been received with hype and enthusiasm. It is hoped that it would support the national economy through the mobilization of capital for new ventures, promotion of new financial products, etc.
The idea of forming a securities exchange was raised in the late 1990s and early 2000s. Unfortunately, with the emergence of the developmental state model in Ethiopia in the middle of the 2000s, the idea was shelved. More than a decade has had to pass for the issue to resurface. As part of the recent economic reform package, the agenda of establishing a securities exchange came to light. After two years of efforts, the Council of Minsters approved the establishment of a capital market. A couple years ago, when the idea gained increasing attention, it was promised that the market would be operational in 2020. But there is still much work to be done.

Over the past decade-and-half, the drive for industrialization through infrastructural expansion and mega industrial projects called for significant resource requirements. Ethiopia has little mineral exports to take advantage of a commodity price boom, so it must mobilize resources from local and foreign sources.

Ethiopia’s financial system is characterised by a high degree of regulation, protection and poor use of technologies. The underdevelopment and traditional practices in the sector is even worse than the standard of neighbouring countries such as Kenya. For instance, the sector to GDP ratio (a measure of financial sector development) is half, and the number of banks is also less than half of Kenya’s. This difference becomes more notable when we consider Kenya’s 54 million population size as compared to Ethiopia’s 115 million in 2020.

The Missing Gap at NBE

For more than a decade, inflation has been a serious problem owing to expansive monetary policy. In recent years, political instability, food supply shortages, and the persistent depreciation of the Ethiopian Birr has exacerbated the inflationary phenomenon, peaking in excess of 20Pct recently. This problem is severely hitting the urban poor and the unemployed. Despite monetary tightening using reserve money as the operational target to control broad money growth, the nation’s inflation is unyielding. It has been persistently high over the past couple of years, and it seems there is no hope in sight of bringing it down to an acceptable level. Another serious trouble with the financial sector is the concentration and increased credit exposure of state banks. Unbridled lending to state-owned enterprises has increased their credit risks. Implicit and explicit debt guarantees by the government has increased the moral hazard where many state-owned enterprises have failed to service their debts according to the terms of their loan agreements, leading to the formation of a new state enterprise to take over their debts.

The massive borrowing, both domestic and external, taken by state-owned enterprises (SOEs) and other agencies is causing financial stress on the government. What has made the matter very worse is that the sheer size of the debts is so gigantic that neither they can be settled by federal government budget nor are they within the financial capacity of the enterprises to repay the loans.

Although development banks have existed since the imperial era, there has not been a time where they played as significant a role as in the past fifteen years. The developmental state paradigm, which was adopted since the mid-2000s, has given renewed impetus for development banking.

The economic policy that envisages fast-track industrialization has developed successive industrial policies. Credit policy has been the lynchpin of the industrial policies. As a result, both state-owned banks, the Commercial Bank of Ethiopia (CBE) and the Development Bank of Ethiopia (DBE) have emerged as major policy instruments.