The government declared (September 4 , 2020) that the existing currency notes would soon be replaced by new currency notes and a new 200-Birr banknote will also be launched. Printing and related costs amounted to Birr 3.7 billion (or USD 105.7 million at the official exchange rate) and the overall value of the newly printed currency was Birr 262 billion and the number of notes (bills) 2.9 billion (‘Reporter’ Amharic, September 5, 2020).
The key and plausible reason given for the currency shift by Dr. Yinager Dessie, Governor of the National Bank of Ethiopia, is that there is currently too much currency (money) circulating outside banks. He did not, however, provide a particular sum for it. A prominent Ethiopian economist, Prof. Befekadu Deguefe, in a television interview in early September (with Gera Getachew on ESAT) cited a figure of 110 billion Birr for currency outside banks. As indicated above, the total replacement sum
replacement currency newly printed is 262 billion Birr which is greater than the currency outside banks cited above by 152 billion Birr. Even allowing for currency within banks and in vault, the newly printed money is significantly greater than currency outside banks, i.e. 110 billion BirrTaking 262 billion Birr as a basis for estimating the total amount of money circulating outside banks that is perhaps closer to the true figure than the 110 billion Birr cited, the excess over the 110 billion Birr would be about 152 billion Birr. The simple calculation is as follows:
Freshly printed 1.Amount-262 bln Birrr
2. Official foreign currency figure for non-banks—–110 bln Birrr
3.20% estimate for currency within banks, and vault money 52 bln (20% of 262)
4.262-52 bln Birr = 210 bln Birr = 210 bln Birr
5.210-110 bln Birr= 100bln Birr= 100bln Birr
So, after adjusting for currency inside banks and vault money, the excess of the newly printed money over the official amount for currency outside banks is 100 billion Birr. Where did this money for surplus paper come from? Two of the prime suspects are here: one is, yes, yes.The primary goal of printing new banknotes, on the other hand, is to neutralize the cash hoards kept in the now old currency in Ethiopia and outside. Cash hoards entering the borders of Ethiopia to fund trade in contraband (both imports and exports) should be curtailed by the border control authorities concerned. Cash hedges used internally for illicit trade and other practices, including terrorism, can, on the other hand, also be managed by the legal compliance agencies involved, including the police and the police.
A)Directly seize, within the boundaries of Ethiopia, alleged and known criminals and confiscate their cash hoards;
(b)Reinforcing border controls;
(c)Reinforcing internal and external global and monetary intelligence;
D)Available state-of-the-art identification technologies for counterfeit currency;
(e) Enabling the Commission for Ethics and Anti-Corruption to act in compliance with its proclamation of establishment, etc. In particular, the National Bank of Ethiopia and the Commercial Bank of Ethiopia.The National Bank of Ethiopia and the Commercial Bank of Ethiopia should, above all, be considerably restructured. We all know the overprinted NBE currency and lent it without any promise to enforce repayment to the government. By disbursing loans in cash without ensuring their repayment, the CBE generated money in its own manner. These two banks were the main conduits outside banks for the currency (110 billion Birr) manipulated by criminals of all kinds, including
The irony is that those same individuals who helped screw up the country’s financial and monetary system are some of the officials who are now leading the on-going currency reform activity.
Now that the move has been taken, however, what are some of the positive results that could accrue? First, this could be a good opportunity to improve the security features of banknotes; some progress can be reported within and outside Ethiopia in neutralizing illegal cash hoards;
Bank deposits may increase dramatically in the process of redemption of old banknotes, and cash savings in the banking system could increase more permanently with cash withdrawal limits; such increased bank deposits could help to mitigate inflationary trends in the economy and boost bank lending operations.
When all is said and done, however, the truth remains that the Ethiopian banking system, particularly the state-owned one, has been plagued by a host of fundamental problems.
Incompetent management, credit policies that are counterproductive, corruption, insufficient technical development and innovation, low capacity for credit analysis, etc. Therefore, it is appropriate to introduce a number of additional reforms. The following are the big ones:
– Reorient the NBE’s key objectives back to inflation management, the stability of exchange rates and sound overall monetary policy in order to ensure the soundness of the banking and financial system of the country;Returning the CBE to its primary functions as a commercial bank (from what it is actually expected to do as a policy bank) in order to engage mainly in short-term loans for domestic trade, exports , imports, working capital and some medium term and long term funding for reliable business expansions and new start-ups for longer-term domestic savings (e.g. time deposits);
Support for the long-term and medium-term growth of businesses and the financing of housing and condominiums and apartments;
— The NBE should enforce straightforward limits with respect to:
— Borrowing from the government
— For liquidity purposes, lending to other banks
— Printing on currencies customized to its core requirements
— Tolerable levels of inflation
Moreover, by applying CAMEL, the NBE should fulfill its obligations as the nation’s banking and financial watchdog (acronym stands for capital adequacy the other hand , in order to mobilize domestic savings to the fullest extent possible, the CBE could significantly enhance its customer support and branch expansion in relation to existing and future market standards. Similarly, on the lending side of the equation, to ensure repayment with interest on the basis of the globally agreed credit analysis benchmark, loans and credits should be closely scrutinized.,In conclusion, we should seek to make the most of the transition in currency that has already become a done deal. Attempts should be made to curb counterfeiting, illegal cash hoards, money laundering and other illicit money transactions and tendencies to depreciate domestic inflation and exchange rates. If properly used, money is an instrument, and a strong one at that, for rapid economic growth.
Several precautions are used to ensure that bank credit is paid with interest and on time, including the following:
— Hedging and collateral
— Thorough consideration of credit risks
— Project review extensively
— Creditors’ Trustworthiness
— Diligent background inspections of borrowers, etc.
In Ethiopia, on the other hand, what we have usually found is that some groups and circles use money (credit) as a means of generating inflation and use the inflation to loot real resources.This phenomenon has been observed all too frequently, especially in the real estate sector, where a preferred borrower with a large bank loan enters a market for building materials and mops up most of the materials at high prices, causing other buyers to go home empty-handed because of too high construction material prices. The bank loans so used can be written off by orders from above to add insult to injury.In the mafia-like economic patronage structure that existed in Ethiopia, particularly before the reformist government put together by Prime Minister Abiy Ahmed, everything is possible. The shift in currency should be taken as a good opportunity to neutralize the use of illicit cash hoards to perpetrate economic sabotage and commit heinous crimes, thereby making bank credit an instrument for rapid economic growth and not an instrument for inflationary economic exploitation.