Page 14 - Print Version Volume 22 - Number 1126
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Page 14                                      Op-ed Notes                                                                   Fortune Vol. 22 No. 1126 Nov. 28, 2021

Financial Sector-sourced Glucose Drips No Remedy to Save Economy

"Against my will, I have witnessed the                                          THBINELOWMWIANINNDYGIS                                                           All of this is in contrast to what was
most terrible defeat of reason and the                                          DIRECTIONS.                                                                      expected to be a time of smooth
most savage triumph of brutality in the                                                                                                                          sailing for banks as the economy was
chronicle of time. Never - and I say so                                         FINANACIAL                                                                       opened up. Full-fledged non-interest
not with pride but with shame - has a                                             SECTOR                                                                         banking institutions have been allowed,
generation fallen from such intellectual                                                                                                                         and non-financial institutions have
heights as ours to such moral depths."       Africa, the Slum                                                                                                    gotten a foothold. These have all been
                                             It was an interesting piece        My                                                                               promising.
Stefan Zweig, The World of Yesterday.             of news last week to learn                                               deal with extremism that arises
                                                  that, following talks         Opinion                                    in other countries and lack of        But contemporary Ethiopia has always
There were discoveries in the scientific          between the military and                           By Christian Tesfaye  sustainable agreements and            been promising; it just never grabbed
or social science frontiers that have        civilian leaders, Sudan’s Prime                                               trusted regional institutions         the opportunity. It has all the land,
altered the course of human history.         Minister would be reinstated.      and now East Asia have the                 with its neighbours. The risk of      resources, labour and geopolitical
But nothing does so with as much             It is the result of a political    wealthiest countries on Earth,             conflicts and proxy wars with         advantage a country needs to develop.
finality and whiplash as war. There is       deal between the different         with a population that enjoys a            such countries is very high.          But the political space to do this has
a reason that human history is told in       forces contending for power.       comparable standard of living.                                                   rarely been forthcoming, and it does
chapters of wars. It upends the way          This could mean that one more      South America and East Europe              The reverse is also true. An          not seem to be the case now for the
people live and their relationship with      disaster is avoided in a region    have emerging economies on the             Ethiopia that is poor and in          financial sector.
authority and nation. It touches on          that has a flood of problems.      path to developed nation status,           crisis will make things harder
nearly every facet of social, political                                         and North Africa and the Middle            for every other member of the         The administration’s policy choices
and economic organisation of society,        The Horn of Africa is a peculiar   East follow closely behind (with           region. It will inflict greater       over the past year are not surprising.
even if it does not last that long, as long  part of the world. With the        oil-rich Arab countries being              pressure on other countries in
as it is bloody enough.                      exception of Djibouti, every       among the wealthiest in the                terms of migration and create         It has put forward a series of
                                             country that is a part of the      world). While there are some               economic paralysis.                   justifications for its actions. It believes
The civil war in Ethiopia is no different.   region is undergoing some          exceptional countries in all of                                                  what it considers "economic sabotage"
But it has impacted a few industries         sort of crisis. From civil war     these regions, the likelihood is           A macro, regional-level               can be plugged back by stopping
as much as it has the financial sector.      in Ethiopia that has dragged       that any nation is about as stable         approach is thus critical to          collateralised loans, especially in
Considering how integral financial           in Eritrea to state failure in     and as rich as its neighbours.             helping individual countries.         fighting capital flight. It also faces
institutions are to the national economy     Somalia, trouble is on the         The same goes for sub-Saharan              This is why organisations             a budget squeeze due to falling
and the government’s policymaking            rise in this region. Add Sudan     Africa. It is like a slum. There           such as the African Union             productivity in the economy and
objectives, this is not surprising. Even     and South Sudan as regionally      could be countries, and                    and trade areas such as the           suspension of aid from development
in a country as unbanked as Ethiopia,        relevant members to the Horn,      individuals, within them with great        African Continental Free Trade        partners. It does not want to have the
where financial literacy is low, banks       and then there is much to          potential. But it does not matter.         Area (AfCFTA) are necessary.          central bank print money, which would
have deposits worth 1.3 trillion Br in       worry about the fate of the        There is poor infrastructure               They have both come out of            exasperate the inflationary pressure
their vaults, over double the federal        countries.                         and weak health and education              the understanding that the            on the economy. By selling bonds to
government’s budget for this year. And                                          systems; thus it is hard to develop        challenges African countries          banks and insurance companies, it
they are growing in number, capital and      In order to address the            human and physical capital. It is          face cannot be addressed one at       wants to make up for a shortfall in
product diversity.                           ensuing disaster, it is critical   impossible to be entrepreneurial           a time but that it is essential to    the federal budget. It hopes that all
                                             to contextualise conflict and      since the institutions that prevail        look at the bigger picture. It tries  of these measures are stopgaps for a
Even as the capital requirement for          poverty in any country from        in the system are extractive. And,         to address the neighbourhood          particularly difficult time for citizens,
establishing a bank has been bumped          the perspective of the region.     if someone builds something                problem in a way that has not         especially those caught up in war.
up 10-fold, promoters are still selling      It would be impossible for any     worthwhile by some miracle, it is          been approached before. While
shares and microfinance institutions         one country to comprehensibly      liable to get stolen as it will stick      individual countries have their       But the financial sector has fragile
are making the transition to the big         address political instability and  out like a sore thumb.                     part to play in getting their own     institutions. They have a terrible time
guys club. There was no way they could       underdevelopment without the       Ethiopia is not living in a good           houses in order, the slum can         surviving in a period of uncertainty.
have gotten past a time of war under the     region as a whole improving        neighbourhood. This is a massive           only be improved by overhauling       Their biggest leverage is not that they
radar. The public has no less appetite       on its economic and political      holdback for the country. It               the whole neighbourhood.              have over a trillion Birr in deposits,
to get a slice of these banks.               indicators.                        does not only mean that it is                                                    although that could mean something.
                                                                                starved of markets close by it             Christian Tesfaye (christian.       The trust they command among
But their luck has been turning as bad       This should be obvious.            can trade with but will have to               institutions and individuals has the
as the political and security situations     Wealth, poverty and conflict                                                  is a researcher and Fortune's         confidence to keep savings in their
in the country. While an environment         are concentrated in specific                                                  Deputy Editor-in-Chief whose          vaults.
of political uncertainty could not           parts of the world. It is not                                                 interests run amok in the
have helped their business case, the         a coincidence that North                                                      directions of political thought,      The more the pressure that mounts on
government's measures have been              America, West Europe                                                          markets, society and pop              them, though, the higher the financial
significant. The most challenging                                                                                          culture.                              sector could unravel. Several banks
issue they face is the suspension of                                                                                                                             or insurance firms do not need to fall
collateralised loans for an unspecified                                                                                                                          for this to happen. A single bank that
period. Although a few exceptions apply                                                                                                                          teeters could spread the infection of
to exporters, credit is the foundation of                                                                                                                        uncertainty across the entire financial
commercial banks business model and                                                                                                                              system. The escalation of the war has
have been limited from engaging in it                                                                                                                            led banks to lose their base for deposit
for the past three months. Not knowing                                                                                                                           mobilisation as they have been deprived
when things will get back to normalcy                                                                                                                            of the market to provide loans. They
makes it more difficult for the banks to                                                                                                                         also fall under intense pressure to
project the future in optimism.                                                                                                                                  generate funds for the war effort and its
                                                                                                                                                                 consequences. If the sector struggles to
Their problems do not end there. The                                                                                                                             keep up, there is a reasonable concern
deposits they have to hold at the central                                                                                                                        that it will take the whole economy
bank as a reserve has doubled to 10pc,                                                                                                                           with it.
lowering their liquidity. And keeping
sound liquidity is hard to come by                                                                                                                               The pressure placed on banks distracts
when a large part of the country is out                                                                                                                          from the source of the problem: the
of reach due to the war to mobilise                                                                                                                              political situation has deteriorated to
deposits. Banks have been forced to                                                                                                                              the point that uncertainty has reached
close their branches in many parts of                                                                                                                            unsustainable levels. It is impossible to
the country since the civil war, which                                                                                                                           run a sound economy under current
began last year.                                                                                                                                                 circumstances, no matter the central
                                                                                                                                                                 banks' somersaults. The economy has
The central bank`s interest rate would                                                                                                                           been given most types of painkillers at
also set them back three percentage                                                                                                                              this point, but these are not working.
points higher than it used to before                                                                                                                             The root of the problem lies in politics,
September 2021. They are no less on                                                                                                                              which cannot be relieved by treating
the hook for holding above ground the                                                                                                                            the symptoms through financial sector-
liberalised treasury market - without                                                                                                                            sourced glucose drips.
much say in the matter. They are
financing the state with below-market                                                                                                                            The road to recovery is the immediate
interest rates.                                                                                                                                                  end of the raging war. The country
                                                                                                                                                                 would get a respite from destruction
Banks are expected to contribute                                                                                                                                 and the population from human
directly to non-financial demands.                                                                                                                               suffering. There are no better ways of
They have since raised over 1.8 billion                                                                                                                          ending the war than through negotiated
Br for humanitarian response efforts                                                                                                                             political settlement. The mediation
for those affected by the civil war                                                                                                                              efforts by the African Union (AU),
through their association. Morally and                                                                                                                           through Chief Olusegun Obasanjo,
ethically, institutions worth billions                                                                                                                           and the Kenyan government should be
of Birr need to support communities                                                                                                                              given a chance. So are the priorities
and individuals devastated by the war.                                                                                                                           clear to put Ethiopia back into a healthy
It is the age of stakeholder capitalism,                                                                                                                         trajectory.
after all. But it is also questionable how
much manoeuvring space they have left                                                                                                                            "In the last resort, every shadow is also
given the ever restrictive regulatory                                                                                                                            the child of light," said Stefan Zweig at
environment and harsh economic                                                                                                                                   the darkest moment for Europe during
situation in the country.                                                                                                                                        the Second World War.
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