|
Ethiopia Banking and Monetary Policy
The 1974 revolution brought major changes to the banking
system. Prior to the emergence of the Marxist government,
Ethiopia had several state-owned banking institutions and
private financial institutions. The National Bank of
Ethiopia (the country's central bank and financial adviser),
the Commercial Bank of Ethiopia (which handled commercial
operations), the Agricultural and Industrial Development
Bank (established largely to finance state-owned
enterprises), the Savings and Mortgage Corporation of
Ethiopia, and the Imperial Savings and Home Ownership Public
Association (which provided savings and loan services) were
the major state-owned banks. Major private commercial
institutions, many of which were foreign owned, included the
Addis Ababa Bank, the Banco di Napoli, and the Banco di
Roma. In addition, there were several insurance companies.
In January and February l975, the government nationalized
and subsequently reorganized private banks and insurance
companies. By the early l980s, the country's banking system
included the National Bank of Ethiopia; the Addis Ababa
Bank, which was formed by merging the three commercial banks
that existed prior to the revolution; the Ethiopian
Insurance Corporation, which incorporated all of the
nationalized insurance companies; and the new Housing and
Savings Bank, which was responsible for making loans for new
housing and home improvement. The government placed all
banks and financial institutions under the National Bank of
Ethiopia's control and supervision. The National Bank of
Ethiopia regulated currency, controlled credit and monetary
policy, and administered foreign-currency transactions and
the official foreign-exchange reserves. A majority of the
banking services were concentrated in major urban areas,
although there were efforts to establish more rural bank
branches throughout the country. However, the lending
strategies of the banks showed that the productive sectors
were not given priority. In l988, for example, about 55
percent of all commercial bank credit financed imports and
domestic trade and services. Agriculture and industry
received only 6 and l3 percent of the commercial credit,
respectively.
To combat inflation and reduce the deficit, the government
adopted a conservative fiscal management policy in the
1980s. The government limited the budget deficit to an
average of about l4 percent of GDP in the five years ending
in EFY l988/89 by borrowing from local sources. For
instance, in EFY l987/88 domestic borrowing financed about
38 percent of the deficit. Addis Ababa also imposed measures
to cut back capital expenditures and to lower inflation.
However, price controls, official overvaluing of the birr,
and a freeze on the wages of senior government staff have
failed to control inflation. By 1988 inflation was averaging
7.1 percent annually, but it turned sharply upward during
1990 as war expenditures increased and was estimated at 45
percent by mid-1991. Moreover, money supply, defined as
currency in circulation and demand deposits with banks
(except that of the National Bank of Ethiopia), rose with
the expansion in government budget deficits, which reached
about 1.6 billion birr in EFY 1988/89. To help resolve this
deficit problem and numerous other economic difficulties,
Addis Ababa relied on foreign aid (see
Balance of Payments
and Foreign Assistance, this ch.).
Data as of 1991
|
