Central Bank Independence is Central
Since the founding of the first bank in the early 20th century, the banking sector had witnessed the heavy-handed interventions of the government. Since NBE started functioning as a central bank as stipulated in Proclamation No. 206 in 1964 this role of the government has continued.
Despite the lack of independence, the central bank has had relative competence in the way its governors execute their duties. There have also been proclamations that limit the government’s excessive interventions and borrowing. These restrictions enabled the bank to control inflation and other economic anomalies. However, the restrictions were lifted in 2008. Since then, inflation has become a major nuisance in the economy, among others.
The technocratic competence of its executives and restrictions on government borrowing were two pillars, which were the reservoir of monetary conservatism for NBE. However, these have been significantly undermined since 2008. Proclamation No. 591/2008 which lifted restrictions on government borrowing from the bank, delegated authority to the government to nominate the governor, vice governor, and board of directors. It also made the central bank accountable to the Prime Minister, severely undermining its independence.
The relaxation of the borrowing limit by the government, followed by an increase in central bank advances to the government, contributed to an inflationary epoch unprecedented in the entire economic history of the country.
In recent years, the appointment of governors has also become more political, with less attention given to the technocratic competence the job requires. In fact, neither academic qualifications nor relevant work experience is being considered in the appointments of successive governors. While NBE requires commercial banks it supervises to have executives with a minimum of 10 years of work experience, of which five should be at the supervisory level, to become bank president, it doesn’t require the same when the government assigns top officials at the central bank. This together with the lack of institutional independence to institute policies that would keep watch over excessive government borrowing has contributed to the central bank’s inability to properly regulate and stabilize the financial sector. It contributed to NBE’s disappointing records of curbing inflation.
Now that inflation has become a brutal annoyance in the economy, and a lot worse economic evils such as macroeconomic imbalances, severe foreign currency crunch, high unemployment, and current account deficit have become the defining features of the economy, the role of the central bank has become central. It needs highly competent executives and less interference from the government to assume its rightful position in achieving these goals.
The NBE needs autonomy to institute conservative monetary policies. The proclamation that made this institution submissive to the government should be amended. The lack of this institutional autonomy has worsened the ills of the economy with inflation at the peak of the crisis.
Ethiopia has paid a high price for the lack of an independent central bank. The lack of merit in the consecutive political appointment of governors has also worsened the overall governance of the economy.
To improve the NBE’s role of ensuring monetary and financial stability, its independence and operational competence are key. This includes re-establishing the NBE as an independent central bank, holding it accountable to the Parliament, choosing its board of directors and governor based on merit, and progressively phasing out excessive government borrowing. EBR
11th Year • Jan 2023 • No. 114