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In his doctoral thesis titled, "Neo-liberalism:
Dead Ends and New Beginnings," Meles Zenawi,
chief architect of the developmental state in
Ethiopia, argues that the assumptions that underlie
the theories of market economy are fraught with
pitfalls. This is, he contends, due to imperfection
in information.
Though the extent may vary from one market to
another, the capital market in particular is one of
the most inefficient markets, he asserts. Meles then
concludes that the best practice from the
perspective of development and growth is not to let
capital get allocated by market forces. Rather, he
said, capital should be rationed across the economy
according to priorities of the state. To effectively
enforce this, there should be state ownership of
financial institutions and it presupposes a
developmental state, which clearly defines its
priorities and has an active presence in the
economic development of a nation.
This is what the incumbent is trying to establish in
Ethiopia today.
There could not be more revealing decision than that
taken by the regulatory body of the state owned
financial institutions under Eyob Tesafye (PhD). In
its recent decision, reported by this newspaper last
week, the Agency suspended the state owned Ethiopian
Insurance Corporation (EIC) from committing equity
worth 30 million Br to the coveted Habesha Cement
S.C., a private sector initiative that is promoting
the erection of a cement plant in Holleta town, 35Km
west of Addis Abeba, in Oromia Regional State.
This is a decision, perhaps most revealing of how
the economics of the nation is working under a Meles-led
administration. It also clearly indicates that the
government's overall strategy and the ensuing
economic structure of the country is more effective
in discouraging businesses and investments that are
not in line with the administration's policy
priorities. Suffice that state owned banks
constitute more than 65pc of loanable assets in the
banking industry in total, according to a recent
report released by the central bank.
Considering that banks are the major financial
intermediaries in an economy and given that there is
no functioning capital market, I am far from
surprised that the government is in a position to
lead the economy according to its priorities, and
easily.
Capital-intensive investment projects, such as the
Habesha Cement, do not seem to fall in the category
of the administration's priorities, as we have now
been told. Hence, it is evident that these types of
projects have no chance in attracting government
attention, at least in the short run. This, in turn,
implies that it will be difficult for such
investment projects to get access to the relatively
large and stable funds, such as that of state owned
banks and insurance firms, as well as pension funds.
Given the fact that the public sector is the main
source of capital, if not business, such investments
will be forced to search for alternative sources of
capital. This is regardless of how profitable the
investment could be. In fact, this is not a liberal
economy, as some would like to see it be.
Private banks could mobilize a significant size of
capital from domestic savings. Unfortunately and
depressingly, little has evolved since the years
when banking first began in Ethiopia. Perhaps with
the exception of Zemen Bank, which seems to be
heralding a new model in banking business, almost
all the banks are engaged in what is known as asset
management banking. They derive their funds
primarily from small customer deposits, normally a
fairly stable source. Their assets are mostly loans
to small businesses and firms.
Fundamentally, the existing private banks are unable
to finance big investments of the size of Habesha
Cement due to many reasons, including their apparent
reluctance to invest in stocks (shares) due to fear
of liquidity risks.
The very thinking upon which banking business is
founded does not enable Ethiopia's private banks to
mobilize large funds from other institutions and
wealthy individuals, which could be in the form of
short-term loans. Thus, they have yet to accumulate
sufficient liquidity in order to lend to big
companies. And this would also be true in the future
so long as they do not change their thinking and
ways of doing business.
Private banks in aggregate constitute only 35pc of
the over 100 billion Br in total deposits mobilized
by the banking system during the last quarter of the
2007/08, according to the central bank. They all
have to get their share of deposits made by
urbanities; given the apparently high consumption in
the urban economy, this group of depositors cannot
be relied upon in order to get sufficient liquidity
that could finance mega investment projects in
Ethiopia.
Paradoxically, the vast rural region of Ethiopia is
also the most marginalized sector, and viewed as
unbankable. Banking infrastructure has to be
improved and extend its reach to the rural sector if
private investors have the possibility to look to
the rural sector as one viable source of capital. It
could be very helpful to form a link to microfinance
institutions, which have become a commanding
presence in the rural financial system. An increase
in productivity in the agriculture sector, coupled
with an improved price for agricultural produce, is
bound to increase rural income and possibly savings.
With the constrained capability of the domestic
finance industry to mobilize large deposits, and the
limited capacity to finance mega projects, the area
of huge investment remains open to foreign direct
investment. However, this too is not without its own
limitations.
Ethiopia's economy is a foreign exchange constrained
economy, structurally. Their chance to get loans
from foreign sources is almost closed when such
investments in particular are not export-oriented.
Investment projects aimed at supplying the domestic
market, however big, are not permitted to access
foreign capital.
There appears to be two things at the heart of the
capital market and private investments in Ethiopia.
On the one hand, private investors and entrepreneurs
are actively looking for profitable investment
opportunities and ideas. On the other hand, guided
by its strategy and ideology, the administration is
bent on bolstering state banks and comforting its
strategic sectors.
In the wake of global
financial crises, a sophisticated financial system
may not be advisable in Ethiopia. However, bankers
and industry experts have to study a new way of
doing banking business with a view to challenge the
government to create a permissible financial
environment so that all opportunities for private
sector investments could get reasonable access to
finance.
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