Fastening on new money creation a way for booming economy

BY HIZKEL HAILU

Economists believe that many investors in Ethiopia seem to prefer investing their wealth on the service sectors than manufacturing. They also agree that private banks are also striving for increasing their income than increasing the national economy.

Indeed National Bank of Ethiopia is mandated to control any loan activity and other financial activities that have to be mobilized by the commercial banks in Ethiopia. According to the economists, working on generating new money is much better than transacting money from banks to banks in order to boom the national economy.

Approached by The Ethiopian Herald, Hailemeskel Gazu said that the National Bank of Ethiopia (NBE) should play its responsibility in structuring modernized controlling mechanisms of private banks’ loan system. Despite the current government is working indispensable activity regarding regulating the finance sector, he suggested the government to revise the finance policy.

As to him, most investors present false Letter in order to get higher amount of loan from banks than presenting appropriate investment plan and financial report. Similarly, commercial banks always worry about their interest than regulating whether the investors have used the loan appropriately or not. Being this is, he noted that the NBE should be independent and free from the government.

Both NBE and Development Bank of Ethiopia have a mandate to regulate and control investors and other commercial banks’ activities whether the investors have used the money they borrowed effectively. Some investors made a loan for investing on the manufacturing sector. Yet, after they received the loan they invest the money at the service sector or else they will buy luxury car or house rather than investing on manufacturing industry.

This will directly harm the national economy. Coupled with that, it should also be considered as a catalyst or a major factor for the occurrence of inflation across the country. Unless both NB and DB could make strong check and evaluation, it is difficult to mitigate this problem, he asserted.

Moreover, the government should work exhaustively in executing monetary policy. In line with this, it would be better for the government if it put different incentives and packages for investors that are engaging themselves in the manufacturing industry. According to Hailemeskel, if number of manufacturing investment increases, it will be possible to build a strong capacity in order to boost the national economy.

And also the government should be responsible to provide appropriate infrastructure around the investment areas where investors would prefer to engage in the manufacturing industries. This, as a result, will initiate investors to change their mind from click trading to the strong industries, he lauded.

Wossonseged Assefa, an economist for his part mentioned that the government should apply a better mechanism aiming to apply a cross check mechanism on the investors’ market system. Though the free market economy system prohibits the interference of the government in the market, it is its duty to stabilize the market through applying different techniques of regulating the investors.

He illustrated that collecting and redistributing taxes along with revising and implementing the policies among the commercial banks are among the techniques that the government can implement in order to stabilize the economy.

Explaining his observance regarding the profitability of private banks in Ethiopia, Wossenseged elucidated that the banks’ profit is highly increasing annually while the country’s inflation is skyrocketing simultaneously. Incredibly, private banks in Ethiopia are most likely working to increase their profit that is supporting the national economic growth, he noted.

He further recommended banks to work aggressively in creating new money than competing to transact the existing money from one bank to the other. As an illustration, banks can exploit their potential in changing the land in to money so as to increase the Gross Domestic Product (GDP) of the country, he added.

According to him, the government should also review its structure in addition to controlling the traders and the agents as well. As the National Bank of Ethiopia receives daily loan and other financial reports from each Commercial Banks, it should strengthen its support and controlling mechanisms whether the investors have used the amount appropriately or not.

As to him, there is a fact that the anti-peace groups that have looted enormous public wealth during their 27-year-long leadership have been engaged in withholding of goods coupled with money laundering in the name of investment which have caused losses on banks.

Mekonen Abera, business analyst for his part stated that banks did not exercise independently the power to augment and diminish the supply of money, but only passively responded to decisions taken by authorities to adjust the stock of cash or base money. Thus the nature of the money supply caused them to regard any necessary reform to be directed at government mismanagement not to the institutionalized practice of money creation by banks.

The availability of loan-money makes possible money creation through manufacturing oriented investment and serves as a vehicle that propels sustained and reckless borrowing. Money is lent after all by the banks with open-eyes and with confidence that the market conditions are promising the funds will be repaid, he added.

For him, Banks should show their economic patriotism in stimulating the national economic growth. When countries experience rapid monetary expansion with attended boom and bust, it is an easy step to correlate the two – the former being the cause and the latter the effect – and advocate the containment of monetary aggregates.

Meanwhile, the NBE has also decided for the reintroduction of project financing by both the Development Bank of Ethiopia (DBE) and the Commercial Bank of Ethiopia (CBE), which was solely assigned to DBE a year ago. CBE was assigned to finance recurrent expenditures.

Documents from NBE stated that the previous decision which allows DBE to focus only on project financing and CBE to focus on recurrent expenditures will be reversed until DBE reaches a higher financial capacity as well as structural competencies that can enable it to solely provide project financing.

Moreover, the National Bank of Ethiopia (NBE) has affirmed its readiness to loan money to any of the 19 commercial banks if they experience liquidity shortages, even though they are in good condition at the moment.

Mentioning that no bank is currently experiencing liquidity shortage, Governor of NBE, Yinager Dessie (PhD) explained in an interview with The Reporter that there is enough amount of reserve money for banks to borrow if they face shortage of cash.

Ever since the Central Bank implemented a transaction limit preventing individuals and businesses from making more than five transfers per week, there has been concern over the growing tendency of cash hoarding among traders.

“We have not come across any evidence showing cash hoarding practice is growing. In fact, our analysis suggests that deposits mobilized by banks are increasing,” Yinager added.

Last year, banks were facing a critical shortage of cash forcing them to work under tight liquidity. Some banks were even slammed for lending more than 100 percent of their outstanding deposits.

According to the economists, however, some notable economists have taken a very different view. They argued that the role of banks as money creators is the principal cause of macroeconomic instability. Besides, Banks are not passive agents whose balance sheets are directed by external causes. Rather banks are seen by them as the engine that drives the business cycle.

All things considered it would better if all the commercial banks work in harmony with the National Bank of Ethiopia and the rest of the government bodies in creating better alternatives to generate new money than transacting the existing amount from one bank to the other. And both NBE and DBE should implement technological controlling mechanisms against investors, economists agreed.

Easier place to invest: make fortunes in the manufacturing sector in Ethiopia! /by Getukk/

The Ethiopian Herald 20 April 2021

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