Can Mamo Overhaul the Central Bank? It’s Long Overdue.

Jan 28 , 2023.

It is not common to see an appointment for a senior federal government office stir debates and controversies. Parliamentarians may grumble about the background and experiences of ministers during confirmation sessions, as they did last week.

Ten of them voted against the confirmations of Alemu Semie (PhD) and Habtamu Tegegn; they seem unhappy that the Prime Minister nominated Alemu as the minister of Transport & Logistics, superseding Dagmawit Moges, despite specialising in mining in his studies. Habtamu, having an engineering background and managing the Ethiopian Roads Authority (ERA), was confirmed to become a minister of Mining, replacing Takele Uma.

Hardly any of these nominations have provoked controversy as the appointment of Mamo Miheretu, the new governor of Ethiopia’s central bank. It could be a good sign, showing public expectations and the degree of importance people attach to the institution.

The criticisms are directed at his lack of experience in macroeconomic and monetary policymaking, least in the banking sector. This has raised legitimate concerns that he may not be able to manage the central bank and its monetary policies effectively.

He studied law and worked for the International Finance Corporation (IFC), focusing on logistics. The closest he came to banking was while serving as a director of the state-own Commercial Bank of Ethiopia (CBE), once he had been in the corridors of power since 2018.

Some have raised concerns about his close ties to Prime Minister Abiy Ahmed (PhD) and his potential lack of independence in making decisions for the bank.

These criticisms are fair to the extent that he may lack a deep understanding of macroeconomic principles, monetary policies, and financial systems and the ability to analyse and interpret economic data. Mamo may have been less exposed to international financial markets and multilateral financial institutions. Neither is he known for the political acumen a governor should have to navigate the political landscape and understand the broader context in which the central bank operates.

This can be compensated by the trust and confidence the Prime Minister puts in him. Mamo is credited by associates for his strong sense of ethics and personal integrity, an asset that can help maintain the autonomy and credibility of the central bank.

However, if history is a better judge, these could be criticisms misdirected and unfair; neither were his predecessors better disposed of in their academic and professional experience before assuming the mantle once held by legends such as Tefera Degefie.

The National Bank of Ethiopia (NBE) has seen four central bank governors since the regime change in the early 1990s. All but one (Leyikun Brehanu) has a background in banking. The longest to serve since its foundation in the early 1960s was Teklewold Atnafu, a trained mathematician employed by the central bank as an expert. He has served nearly two decades, when the Birr saw steady depreciation against a basket of major currencies, including three policy measures in devaluation.

But these were decades of phenomenal economic growth unprecedented in Ethiopia’s economic history. It was also a tenure defined by macroeconomic imbalances due to the structural deficits in the balance of payments, trade and budget. The outcome remains chronic inflation in double digits.

The EPRDFites made the central bank’s role focus on promoting double-digit economic growth and reducing poverty, taking a calculated gamble. Politics primed, and the central bank was never free of executive interference. It should be understandable, though.

The vital function of a central bank is to support the overriding economic growth objectives of the government of the day and ensure price stability through inflation targeting. These are roles all the central bankers before Mamo have chosen or made to relegate to the mandate of regulating the financial sector. The central bank remains more of a federal regulatory agency, with its officials having a knack for harassing bosses of banks and insurance firms. Mamo can push for forming a separate federal regulatory agency overseeing the industry, allowing the central bank to focus its attention where it matters most.

Ethiopia’s National Bank faces several macroeconomic challenges, including high inflation, dwindled forex reserves, and a weak banking sector. It also carries the burden of promoting economic development and reducing poverty. It has not been able to respond effectively to stabilise the national economy due to various factors, including a lack of resources and expertise in macroeconomic management.

A central banker plays a crucial role in ensuring macroeconomic stability, setting monetary policies and managing the money supply; hence controlling inflation and ensuring the economy grows sustainably. A central banker can help to promote financial stability by ensuring that the banking sector is well regulated and that the financial system is resilient to economic shocks.

Ethiopia’s central bankers operate in an economic environment where structural constraints impede growth. Poor infrastructure, an inefficient public sector, and a feeble private sector do little to help the economy become domestically productive and globally competitive. The economic space has a large informal sector, deprived of access to capital and with limited ability to grow.

Lately, a civil war, stubborn insurgency and a broader political instability have confronted the prospect for economic growth, as has a lack of foreign investments. Ethiopia’s high poverty rate has hindered economic development, limiting access to capital formation by the private sector and asset build-up at the household level.

Mamo’s tenure at the central bank will unlikely be free from these multiple challenges. But these are issues the administration he serves has been facing. His most pressing task would be to push for legislative changes to help him build trust with the public through changes in the central bank’s accountability to Parliament rather than the Prime Minister.

The degree to which central banks should be free of the whims and wishes of the executive branch remains a subject of intense academic and policy debates.

The rationale for central banks’ autonomy is achieving a level of policymaking room to lower inflation, better manage political impacts on economic cycles, stabilise the financial system without falling prey to political expediencies, and ensure monetary policy discipline to shield the macroeconomy from volatility and recessions.

Experts from the International Monetary Fund (IMF) looked into the experience of 163 central banks a decade ago to see how many could set final monetary policy objectives on their own. Whether there are legislations that empower central bankers’ positions in the event of conflicts with the executives’ fiscal policy agenda was also an area these experts examined. Their findings revealed that advanced economies have central banks enjoying high levels of autonomy compared to developing countries where markets are operating in low economic and political autonomies.

Mamo may find it above his pay grade to persuade his boss, the Prime Minister, to relinquish the power to appoint and supervise the central bank governor and the mandate to constitute the board. But it should not be for lack of trying.

However, he can impress upon the Prime Minister to let him have his own team with the appointment of a chief economist of proven reputation. He could address the criticisms of his lacking experience in the finance and monetary policy fields, while the installations of two vice governors signal the market that he means business in overhauling an indispensable institution long left to its fate.

The central bank suffers from poor governance and management practices, which led to inefficiency, lack of accountability, and poor decision-making. This has put NBE in a weak position where the governor has lost control to stabilise the Birr against other major currencies. Inflation is on autopilot.

Ethiopia’s central bank has a regrettable reputation for being untransparent and unaccountable, costing the public trust in the institution and the financial system. Mamo’s priorities should be restoring faith in the institution through reforming the central bank with a clear strategy and plan for building its technical, operational, and regulatory capabilities. Strengthening its IT systems, risk management and compliance, and financial reporting systems could be tasks left for yesteryears.

PUBLISHED ON Jan 28,2023 [ VOL 23 , NO 1187]

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