Central Bank’s Haphazardness Costing the Economy

After decades of indecisiveness and partiality, the National Bank of Ethiopia (NBE) was seemingly returning to its senses as of the last two years. Close to 60 directives have been revised under reform initiatives of the current government, laxing its previous restrictive bars. Nonetheless, the last few months have proven that the central bank was only partially baptized. Beginning May 2020, the central bank has introduced two directives that are chocking the business environment unlike never before. On the 19th of May last year, NBE introduced cash withdrawal limits for the first time. Individuals and companies were respectively allowed to withdraw only ETB100,000 and 300,000 per day and ETB1 and 2.5 million per month. Six months ago, the central bank went further to introduce a directive capping businesses’ cash holdings at ETB1.5 million and 200,000 for individuals.

Unsatisfied with results, further adjustments were made to the directives. In mid-March 2021, the central bank tightened cash holdings even more to ETB200,000 for companies and ETB100,000 for individuals. Also, withdrawal limits were reduced to ETB50,000 and 75,000 per day for a person and juridical person, respectively.

NBE advised businesses to work around the restrictions by using account-to-account transfer mechanisms instead of cash. However, the bank then went on to cap transfers to five per week, irrespective of volume.

The Construction Contractors Association of Ethiopia was the first to officially denounce the blindfold caps on cash holdings and number of transactions. Cash is the lifeline of businesses and organizations in Ethiopia’s current stance.

The aim of the move was to discourage cash-based transactions and reduce informal cash hoarding by individuals. But NBE’s latest tightening measures have a backing reason outside of what government officially states. Commercial banks are again facing a liquidity crunch, even after the demonetization and subsequent return of circulating currency to banks’ vaults.

The first series of restrictive NBE directives backfired to create this liquidity crunch. Limits on the volume and frequency of cash transactions triggered companies to return to previous norms of stocking their money in hand and away from banks. Businesses are seen only withdrawing and not depositing money. If they are unable to access enough cash for daily dealings, hoarding cash makes sense as they have to keep their businesses afloat.

The central bank has not comprehended that operators in Ethiopia’s economic engine of Mercato are extremely fast-paced and thus prefer cash transactions. There is no efficient, dependable, and real-time banking system that can parallelly operate with their fast nature. Hence, NBE is only capable of holding the cash supply, instead of going as fast as the businesses want.

If NBE is really not into political obedience, it should train its capacity towards repurposing commercial banks and businesses to partake in a digital financial system, which is easier to control. However, encouraging businesses to use account transfers is meaningless if companies cannot make more than five transactions per week.

A central bank, which proudly pronounces it is in the middle of financial sector reform, is obviously unable to operate as fast as businesses. In fact, NBE is introducing directives haphazardly overnight without evaluating worth or impact.

Once again, the central bank is losing its institutional integrity and entangling itself with illogical decisions that are foreign to the nation’s business trends. Noted that some companies only want cash transactions for nefarious reasons and the government might excuse itself that the latest cash caps are to counter illegal financial flows that might water political factions. However, illegal money flow can only be controlled by strong intelligence and not strong mishaps. EBR

9th Year • Mar 16 – Apr 15 2021 • No. 96