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Why Aid Is Not Working and How There Is a Better Way for Africa

We live in an era of the culture of aid which highlights ‘the rich should help the poor and that is morally good’. This conception is reinforced by pop culture (from Bob Geldof to Bono), the media, and a number of global initiatives that make aid the norm of dealing with poverty and its adverse effects on humanity. Yet the impact of aid on Africa’s success in the fight against poverty has remained one of the most contested issues of our time.



The Ethiopian economy has been suffering from external debt distress for the past few years as has been observed in many developing countries. In the poorest countries, the debt distress arrived before COVID-19 as confirmed by the World Bank International Debt Statistics of 2021. In the wake of the COVID-19 outbreak, many countries demanded debt restructuring, motivating the World Bank and International Monetary Fund (IMF) to call for the Debt Service Suspension Initiative (DSSI), endorsed in April 2020. This initiative has benefited many countries in sub-Sahara Africa including Ethiopia, Kenya, Angola, Nigeria, Namibia, Chad, and Ghana, as they were eligible to borrow from the International Development Association (IDA).



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.



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.



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.



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