Interview with Professor Teshome Abebe

Interview with Professor Teshome Abebe. Central bank regulators faced harsh criticism from parliamentarians this week over their failure to bridge the yawning gap between the official and parallel market exchange rates. MPs grilled regulators including Governor Mamo Mihretu about a range of issues including devaluation, forex management, and concerns over local banks’ competitiveness in light of the banking industry’s pending liberalization.

Mamo and his team from the National Bank of Ethiopia (NBE) were present before the standing parliamentary committee for Planning, Budget, and Finance Affairs on November 30, 2023, to elaborate on the central bank’s first quarter performance.

During the nearly four hours of back and forth, several MPs demanded to know why the central bank had failed to bridge the gap between the official and parallel market exchange rates. “Black market operators are operating without fear, including in front of the central bank premises but the central bank is not controlling it. The forex cannot come to the official market while the parallel market is offering double the official exchange rate,” said an MP.

MPs asserted a dollar goes for up to 115 birrs on the parallel market, while banks offer 56 birrs for the same. “Is the central bank considering devaluation to narrow the wide gap?” asked another MP.

Mamo and his colleagues shrugged off the questions before Desalegn Wodaje, chair of the standing committee, called for a renewed effort to fight the parallel market. “The central bank has to use all policy options including devaluation, if it is necessary to bridge the widening gap. We know the bank is taking measures to fight the black market but more effort must be exerted,” he said.

MPs also criticized the misallocation of scarce forex but Yenehasab Tadesse, director of forex monitoring and reserve management at NBE, deflected the question with an overview of the basic procedures in the LC approval process.

Parliamentarians lambasted the failure to reconcile official and parallel exchange rates as the root cause for the forex crunch and trade imbalance problems gripping the country. The position matches that of the IMF and World Bank, who demand a devaluation as a precondition for supporting Ethiopia’s post-conflict development endeavors.

MPs have also criticized regulators for keeping deposit interest rates at seven percent, which they deem too low. They argue the rates discourage saving and push inflation and suggested regulators would be better off raising them instead of capping bank lending growth at 14 percent – a policy the NBE introduced a few months ago.

“Lifting the lending cap and allowing unlimited loan disbursements might spur growth in the economy. But that growth cannot be sustainable. The growth would be like a house built on sand. We must avoid a ‘growth at any cost’ approach,” responded Governor Mamo.

The Governor also addressed concerns over perceived risks to local banks as the federal government prepares to liberalize the banking industry. “We serve the public, not the banks,” said Mamo. “Local banks have been profiting from NBE protection but our priority now is access to finance and containing inflation.”

Regulators told MPs that several pieces of legislation are nearing completion, including a proclamation that would legally re-establish the NBE.