The Financial Sector, and All It Can Offer Ethiopia

Mar 23 , 2019
By Asseged G. Medhin

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Allowing the theory of free-market economy to dictate policymaking can unleash the potential of the economy, which has been constrained by lack of competitiveness. This can start with the financial sector, writes Asseged G. Medhin (kolass799728@yahoo.com), deputy CEO of operations at the National Insurance Company of Ethiopia (NICE).

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Ethiopia, Africa’s second most populous nation, and one of the biggest economies on the content, has one of the lowest income per capita nonetheless, 883 dollars in the past fiscal year. This is despite a rapid economic growth.

Ethiopia aims to reach lower-middle-income status within six years. This requires a Gross National Income (GNI) per capita of at least 1,006 dollars. Middle-income countries are home to five of the world’s seven billion people and 73pc of its poor.  At the same time, middle-income countries represent about one-third of global GDP and are major engines of global growth.

Our country, in its unrelenting drive to join this group, has experienced strong, broad-based growth averaging 10.3pc a year for a decade beginning in the 2006/07 fiscal year. This is compared to the regional average that is only half as fast. Agriculture, construction and services accounted for most of the growth while manufacturing is nowhere where we want it to be.

There are incredible news that have come out of this result, however. The share of the population living below the national poverty line has decreased to under a quarter of the population. This is not a small feat considering the challenges the nation continues to face and its track record of the past century.

It cannot be denied though that there remain challenges to sustain positive economic growth and accelerate poverty reduction, which both require significant progress in job creation as well as improved governance. More crucially, there is a need for fresh ideas and the strength of mind to walk away from one-fits-all policy prescriptions.

What a failure in economic policymaking and administration has contributed to is lack of competitiveness. This has constrained the development of manufacturing, the creation of jobs and the growth of foreign currency reserves.

True, the government aims to expand the role of the private sector though it never has been clear how this can be done without strong liberal policies. Infrastructure is good but it cannot solely help businesses become competitive on the international stage. The outcome shows that there is a need for policy amendments, which should start with the financial sector.

It was intended and depicted in policy documents that the financial sector is indispensable to mobilising savings, facilitating payments and trade of goods and services, and promoting an efficient allocation of resources.

This has been true for many countries in the world. Supporting financial sector development has been a key priority of development assistance in the past several decades. For instance, the Asian Development Bank (ADB) provided assistance - technical assistance, lending, equity investment, or credit guarantees - to the financial sectors of its developing member countries amounting to over 19 billion dollars since the 1970s.

In its recently adopted Strategy 2020, ADB reaffirms financial sector development as one of its core areas of operations in the coming years in support of inclusive and environmentally sustainable growth, regional integration, and poverty eradication in Asia and the Pacific.

This is something that financial institutions in Ethiopia, which are now too harshly regulated, could contribute to. There is a need to relax the regulatory regime so that technical assistance, lending, equity investment, credit guarantees and project financing can be broadly accessed. This, of course, would require a new approach and intervention, which is free from political ideology.

Financial systems that are more effective at pooling the savings of individuals promote economic development by increasing savings, exploiting economies of scale, and overcoming investment hurdles. Large projects with financial arrangements that mobilise savings from many diverse individuals and diversify the investment portfolios of risky projects, facilitate reallocation of investment toward higher return activities with positive implications for economic growth.

Better savings mobilisation boosts technological innovation and improves resource allocation, which reduces individual savers’ high costs of acquiring and processing information on firms, managers, and market conditions, which could prevent capital from flowing to its best uses.

When there is a dynamic environment, relaxed intervention and regulatory framework every participant in the sector - bankers, depositors, insurers and financial intermediaries - reduce information costs through specialisation. They help improve resource allocation and accelerate growth.

Improved information also helps identify the best production technologies and those entrepreneurs with the best chances of successfully initiating new goods and production processes. Stock markets may also stimulate the generation of information about firms. As markets become larger and more liquid, agents may have greater incentives to expend resources in researching firms because it is easier to profit from this information by trading in big and liquid markets.

Large and liquid bond markets - an integral component of a developed financial sector - can also enable both the government and the private investors to raise capital to invest in key infrastructure. These key infrastructure facilities are part of the enabling environment for the private sector to grow and reduce poverty.

It should also be understood that the financial sector’s greater ability to reduce risks through risk sharing and diversification enable a country to better absorb economic shocks, leading to a more stable macroeconomic environment, which supports growth.

We need to check the benefit obtained and the rationale behind a free-market economy, and there is no better time than now, when a new fresh start is trying to be charted in the political as well as economic front, to do this.

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PUBLISHED ON Mar 23,2019 [ VOL 19 , NO 986]

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